GROWING A GLOBAL ENERGY BUSINESS ... in central Australia, is Australia’s largest onshore resource...

INSIDE

INTRODUCING SANTOSCompany profile and history, and an overview of Santos’ vision, strategy and values.

2005 OPERATING AND FINANCIAL HIGHLIGHTS2 Key results for 2005 and three-year

performance.

PROGRESS ON THE GROWTHSTRATEGY IN 20053 Milestones that delivered on the growth

strategy during 2005 and activitiesplanned for 2006.

CHAIRMAN’S REVIEW4 Stephen Gerlach comments on Santos’

performance in 2005.

MANAGING DIRECTOR’S REVIEW5 John Ellice-Flint reviews a year of record

financial, safety and environmentalperformance, successful exploration,outstanding reserve replacement and fast-tracked developments.

MEETING STRATEGIC TARGETS9 Explanation of Santos’ good performance

against its long-term targets.

THE WORLD OF SANTOS10 Locations of Santos’ global exploration,

development and production activities.

DELIVERING RECORD FINANCIAL PERFORMANCE12 Putting the numbers in perspective and

explaining the 2005 financial results.

ACHIEVING OPERATIONALEXCELLENCE14 Production and sales analysis plus activities

that are creating value from Santos’changing production profile.

PRODUCTION STATISTICS16 Summary of production results for 2005.

CAPTURING NEW RESOURCES17 Exploration results, acreage additions and

new ventures in 2005, together with theprogram for 2006.

EXPANDING GLOBALLY THROUGHGROWTH PROJECTS20 Development projects that commenced

production or were further progressed.

BROADENING COMMERCIALISATION HORIZONS22 Market context, new gas contracts and

innovative use of infrastructure hubs.

REALISING VALUE AND BALANCINGTHE PORTFOLIO24 Strategic projects and portfolio

management activities.

GROWING THE SIZE AND VALUE OF RESERVES26 Analysis of reserves movements in 2005.

MANAGING FOR LONG-TERMSUSTAINABILITY 28 Sustainability framework, polices, systems

and activities, including safety andenvironmental performance, employeesand communities.

CORPORATE GOVERNANCE34 Details of the main corporate governance

practices Santos has in place.

REMUNERATION REPORT40 Remuneration details for Directors and

key executives.

MAJOR ANNOUNCEMENTS MADEBY SANTOS DURING 200554 Major releases to the market as part of

continuous disclosure.

BOARD OF DIRECTORS55 Directors’ biographical details.

LEADERSHIP TEAM 56 Management structure and senior

executives’ responsibilities andbiographical details.

GROUP INTERESTS58 Santos licence areas and percentage

interests.

10 YEAR SUMMARY 60 Statistical summary of financial

performance.

FINANCIAL REPORT62 Income statements, balance sheets,

cash flow statements, statements ofrecognised income and expense, and notesto the consolidated financial statements.

DIRECTORS’ STATUTORY REPORT63 Directors’ shareholdings, meetings,

activities and emoluments.

STOCK EXCHANGE ANDSHAREHOLDER INFORMATION137 Listing of top 20 shareholders, analysis

of shares and voting rights.

INFORMATION FORSHAREHOLDERS139 Annual General Meeting, final dividend,

shareholder enquiries and informationresources for shareholders.

GLOSSARY140 Most frequently used terms explained.

BACK COVERCorporate directory

Santos Ltd ABN 80 007 550 923 COVER PHOTOGRAPH:Roger Lewis (right), Mutineer-Exeter Project Close Out Manager,

inspecting the MODEC Venture 11 Floating Production Storage and Offtake vessel with a Quality Assurance Engineer.

NAVIGATING

SUCCESSAnnual Report 2005

REGISTERED AND HEAD OFFICEGround Floor, Santos House91 King William StreetAdelaide, South Australia 5000GPO Box 2455Adelaide, South Australia 5001Telephone 08 8218 5111Facsimile 08 8218 5274

SHARE REGISTERGround Floor, Santos House91 King William StreetAdelaide, South Australia 5000GPO Box 2455Adelaide, South Australia 5001Telephone 08 8218 5111Facsimile 08 8218 5950

OFFICESBrisbaneLevel 14, Santos House60 Edward StreetBrisbane, Queensland 4000Telephone 07 3228 6666Facsimile 07 3228 6777

Perth Level 28, Forrest Centre221 St Georges TerracePerth, Western Australia 6000Telephone 08 9460 8900Facsimile 08 9460 8971

Port BonythonPO Box 344Whyalla, South Australia 5600Telephone 08 8640 3100Facsimile 08 8640 3200

United States of AmericaSantos USA Corp.10111 Richmond Avenue, Suite 500Houston, Texas 77042 USATelephone 1-713 986 1700Facsimile 1-713 986 4200

Papua New GuineaBarracuda LimitedLevel 8, Pacific PlaceCnr Champion Paradeand Musgrave StreetPort Moresby, PNGTelephone 675 321 2633Facsimile 675 321 2847

Representative office of SantosAsia Pacific Pty Ltd in JakartaLevel 9, Ratu Plaza Office TowerJalan Jendral Sudirman Kav 9Jakarta 10270 IndonesiaPO Box 6221, JKS GN Jakarta 12060 IndonesiaTelephone 62-21 270 0410Facsimile 62-21 720 4503

USEFUL EMAIL CONTACTSShare register enquiries:[email protected]

Investor enquiries:[email protected]

Employment enquiries:[email protected]

WEBSITEwww.santos.com

CORPORATE DIRECTORY

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PLEASE RECYCLE THIS REPORTThis Annual Report is printed in Australia onrecyclable paper from sustainable plantationforests. The manufacture of this paper isexternally certified to the ISO 14001Environmental Management System,complying with International Standards.

The printing process uses digital printingplates, which eliminate film and itsassociated chemicals. The vegetable-basedinks used in the printing process use linseedoil, which is made from renewable sourcessuch as flax, rather than the traditionalhigher greenhouse gas emitting mineral oils.

HELP SAVE PAPER BY DOWNLOADING ANELECTRONIC VERSIONAn electronic version of this Annual Report is available on Santos’ websitewww.santos.com.

Shareholders who do not require a printedAnnual Report, or who receive more than one copy due to multiple shareholdings, can help reduce the number of copies printed by advising the Share Register inwriting of changes to their Annual Reportmailing preferences.

Shareholders who choose not to receive aprinted Annual Report will continue to receiveall other shareholder information, includingnotices of shareholders’ meetings.

VISION

Santos has a vision that by the end of the decade it will become the leading energy company in South East Asia with a share price thatcontinues to grow and a reputation for sustainability in its operations.

Santos’ vision of future success is to be a safe, low cost, fast-movingexplorer and producer and an agile niche player with a well developedability to manage relationships with employees, partners and otherstakeholders.

As the Company grows, it will provide a working environment thatencourages innovation across the business and where employees are engaged in something which is tangibly more than just a job.

STRATEGYSantos has in place a robust growth strategy to achieve this vision. It has three main components, which are illustrated on the opposite page:

• Enhance existing core areas in eastern and Western Australia.

• Mature emerging core areas in Indonesia, the TimorSea/Bonaparte Basin area and Papua New Guinea.

• Identify new core areas in North Africa, Central and South EastAsia and the United States.

VALUES

Santos aspires to a set of values which are the guiding principles that define how it conducts its business and what it stands for as a company. This means working as a team that:

• Discovers – through being creative, making courageous decisions,learning from successes and failures to continually improveeverything we do.

• Delivers – through being accountable for actions and decisions,creating the right alignment with partners, striving for excellenceand effective results.

• Collaborates – through building trusting relationships based onmutual respect, sharing what we know for the benefit of othersand demonstrating leadership.

• Cares – by doing the right thing and assuring our future.

These values are the basis of Santos’ commitment to operating with aview to its long-term sustainability as an energy company.

SANTOS IS A MAJOR AUSTRALIAN-BASED OIL AND GASEXPLORATION AND PRODUCTION COMPANY GROWING A GLOBAL ENERGY BUSINESS.

Main photograph:Paul Nardone, Completions Supervisor.

Small photographs (left to right):MODEC Venture 11 Floating Production Storage and Offtake vessel;

close-up of drill sections; ENSCO 56 jack-up rig conducting developmentdrilling over John Brookes wellhead offshore Western Australia;

Emma Wild, Staff Development & Economics Engineer.

COMPANY PROFILE

Santos is a major Australian oil and gas exploration and productioncompany with interests and operations in every major Australianpetroleum province and in the United States, Indonesia, Papua NewGuinea, Kyrgyzstan and Egypt.

Santos is one of Australia’s largest gas producers, supplying sales gasto all mainland Australian states and territories, ethane to Sydney,and oil and liquids to domestic and international customers.

The Cooper Basin, which Santos and its joint venture partners havedeveloped in central Australia, is Australia’s largest onshore resourceproject.

In Australia, Santos has one of the largest exploration portfolios byarea of any company and has assembled a large, well-situated acreageposition in Indonesia and the United States. The Company is alsopursuing new venture opportunities in North Africa, the Middle East,and Central and South East Asia.

Santos is positioning itself to perform alongside the top quartile of the world’s oil and gas companies – rapidly expanding its explorationinterests and delivering production growth through an exciting suite ofgrowth projects.

Santos Ltd is listed on Australian Stock Exchange – ordinary sharescode STO; preference shares (FUELS) code STOPB.

At year end 2005, Santos had a total market capitalisation ofapproximately $7.9 billion, making it one of Australia’s Top 40companies.

Santos American Depository Receipts are issued by Citibank, N.A. and listed on the NASDAQ (code STOSY).

HISTORY

Founded in 1954, Santos has been active in the energy business formore than 50 years. Its name was an acronym for South AustraliaNorthern Territory Oil Search.

Santos made its first significant discovery of natural gas in the CooperBasin with the Gidgealpa 2 well in 1963. The Moomba 1 discovery in1966 confirmed this region as a major petroleum province.

As a result of these discoveries, Santos had a commercially viablequantity of gas and entered into Gas Sales Agreements with the SouthAustralian Gas Company, the Electricity Trust of South Australia andthe Australian Gas Light Company. Gas supplies commenced in 1969.

The 1980s saw Santos develop a major liquids business following thediscovery of oil at Tirrawarra in the early 1970s. A liquids recoveryplant was built at Moomba, along with a fractionation and loadoutfacility at Port Bonython.

By the 1990s Santos had become a major Australian operatingenterprise with interests in United States and United Kingdompetroleum provinces and in emerging areas such as the Timor Sea and Carnarvon Basin in Western Australia.

A number of acquisitions in the 1990s provided Santos with additionalopportunities onshore and offshore Australia, Indonesia and PapuaNew Guinea.

Since 2000 Santos has continued to build its business in South EastAsia, the United States and southern Australia, while undertaking a high impact exploration program and developing new projects todrive production and earnings growth.


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VISION








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COMPANY PROFILE









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NAVIGATING














CORPORATE DIRECTORY

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IT WAS THE YEAR THAT WE MADE SIGNIFICANT AND

LASTING INROADS TOWARDS OUR STRATEGIC VISION.

WITH THIS SUCCESS COMES THE OPPORTUNITY TO

NAVIGATE THE PATH TO FURTHER GROWTH AND

PROSPERITY AND CONSOLIDATE OUR POSITION AS

ONE OF SOUTH EAST ASIA’S LEADING UPSTREAM OIL

AND GAS COMPANIES.

2005, BY ANY MEASURE,WAS A GOOD YEAR FOR SANTOS.

2001 2003 2005 2007 2009 2011 2013

MATURE EMERGING CORE AREAS Indonesia, Timor/Bonaparte,

Papua New Guinea.

IDENTIFY NEW CORE AREAS North Africa, Central and

South East Asia, United States.

ENHANCE EXISTING CORE AREAS Eastern and Western Australia.

ENHANCE

MATURE

IDENTIFY

SANTOS GROWTH STRATEGY

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0

500

1,000

1,500

2,000

2,500

’05 ’04 ’03

SALES REVENUE $million

2,463

1,5011,465

LPGCondensate

Crude oilSales gas & ethane

0

25

50

75

100

125

150

’05 ’04 ’03

EARNINGS & DIVIDENDS PER SHARE* cents

124

54 52 38

33 30

Earnings per share

Ordinary dividend per share

0

10

20

30

40

RETURN ON ORDINARY EQUITY* %

’05 ’04 ’03

35.1%

19.9%

12.3%

0

160

320

480

640

800

’05 ’04 ’03

NET PROFIT AFTER TAX* $million

762

355 327

0

320

640

960

1,280

1,600

’05 ’04 ’03

GEARING* $million

1,599

1,133

898

0

20

40

60

80

100

’05 ’04 ’03

35.0%32.5% 22.5%

Net debt

Gearing

0

2

4

6

8

10

’05 ’04 ’03

SAFETY PERFORMANCE Total recordable case frequency rate(per million hours worked)

4.9

6.4 7.2

0

300

600

900

1,200

1,500

’05 ’04 ’03

OPERATING CASH FLOW $million

1,458

605

897

1,458

2 Annual Report 2005

2005 OPERATING AND FINANCIAL HIGHLIGHTS

2005 2004

Sales ($million) 2,462.8 1,500.9

Operating profit before tax ($million) 1,133.5 518.8

Cash flow from operations ($million) 1,457.9 605.0

Earnings per share (cents) 124.4 54.2

Ordinary dividends per share (cents) 38 33

Cash flow per share (cents) 248.0 103.4

Total shareholders' funds ($million) 2,964.0 2,357.8

Return on average ordinary equity (%) 35.1 19.9

Return on average capital employed (%) 19.8 11.7

Net debt/(net debt plus equity) (%) 35.0 32.5

Net interest cover (times) 14.9 9.1

0

10

20

30

40

50

60

LPGCondensate

Crude oilSales gas & ethane

’05 ’04 ’03

PRODUCTION BY PRODUCT mmboe

56.0

47.1

54.2

• Production up 19% to 56.0 mmboe.

• Revenue up 64% to $2.5 billion.

• Net profit up 115% to $762 million.

• Dividend up 15% to 38 cents per share.

• Proven plus Probable (2P) reserves up 20% to 774 mmboe.

* From 2004, amounts reflect Australian equivalents to International Financial Reporting Standards (AIFRS). 2003 comparatives reflect previous Australian Generally Accepted Accounting Principles and have not been restated.


0

2

4

6

8

0

’05 ’04 ’03

AFETY PERFORMANCE tal recordable case frequency rateer million hours worked)

4.9

6.4 7.2

3Annual Report 2005

• Production commenced from Mutineer-Exeter oil and John Brookes gas projects in Western Australia.

• Leading coal seam gas position established in eastern Queensland.

• Exploitation of Cooper Basin oil resources with 80% success rate from 29 wells drilled; significant activity planned for 2006.

• Gas production from Casino project offshore Victoria achieved in February 2006 plus reserves addition from nearby Henry gas discovery.

• First cargoes from the Bayu-Undan Darwin LNG facility in February 2006.

• Significant gas discovery at Caldita in the Timor/Bonaparte region; extensive seismic and drilling program planned for 2006.

• Appraisal of the Jeruk oil discovery and development of the Oyong and Maleo fields in East Java, Indonesia.

• Discovery of gas and condensate at Hiu Aman in the Kutei Basin, Indonesia.

• New country entry in Kyrgyzstan.

• Regional studies in South East Asia, with a further new country entry likely during 2006.

4

6

8

10

12

14

January 2005 December 2005 January 2003

$

January 2004

Mutineer-Exeter sanction

John Brookes sanction

Novus asset acquisition

Jeruk 2 flows oil

John Brookes start-up

Bayu-Undan LNG sanction

Moomba incident

Bayu-Undan liquids start-up

Casino sanction

Mutineer-Exeter start-up

Tipperary acquisition

Caldita discovery

SANTOS (STO)

ASX ALL ORDINARIES

Minerva start-up

Oyong & Maleo sanction

SANTOS VS ASX ALL ORDINARIES INDEX THREE-YEAR RELATIVE PERFORMANCE

PROGRESS ON THE GROWTH STRATEGY IN 2005

MATURE EMERGING CORE AREAS

IDENTIFY NEW CORE AREAS

ENHANCE EXISTING CORE AREAS


4

Santos delivered a very strong financialperformance in 2005, building on its strategyand achievements of recent years andpositioning the Company for further growth.

It is pleasing to report that the successfulimplementation of our growth strategyenabled Santos to take advantage of buoyantoil prices, which resulted in earnings pershare growth in 2005 of 130%.

Net operating profit increased by 115% to a record $762 million in the year ended 31 December 2005. The record profit was up from $355 million in 2004 and easily eclipsedSantos’ previous highest annual profit of$487 million in 2000.

Santos’ strong 2005 earnings performancewas driven by a 64% increase in total annualsales revenue to $2.5 billion. This in turnreflected a 19% improvement in Santos’annual production to 56 million barrels of oil equivalent (mmboe), together withcontinuing high prices for most products.

Operating cash flow at $1,458 million wasalso substantially higher compared with $605 million in the previous year. Gearingincreased by only 3% to 35% despite a period of heavy capital expenditure and the acquisition of Tipperary Corporation for more than $600 million.

The return on capital employed grew to 20%,well above our annual target of 10% and amost pleasing improvement in this importantindicator of financial efficiency.

Santos’ strong 2005 performance and positiveoutlook have enabled Directors to increasethe annual dividend for the second successiveyear. A fully franked final dividend of 20 centsper share has been declared, taking the totalannual dividend 15% higher to a fully franked38 cents per share, compared with 33 cents in 2004 and 30 cents per share in 2003.

The total shareholder return for the year,including share price appreciation anddividends paid, was a most pleasing 50%.

As you will see in the Managing Director’sreview, the record-breaking 2005 earningsand revenue performance has been achievedduring a period of further considerable

change within Santos, notably ourbroadening production base and the successful commissioning of new areas of operation.

That change will accelerate as Santos’business continues to develop and it has been pleasing to see the production growthand very positive reserve replacementachieved during 2005.

The Board places the highest priority onsafety and environmental management and we congratulate our employees andcontractors on achieving improvements in these areas during 2005.

Our focus on high quality corporategovernance has again been recognised by the independent report prepared by leadingaccounting and management firm, Horwath,and the University of Newcastle. For thefourth successive year, this highly respectedreport has awarded Santos a measure of fiveout of five for its corporate governance.

Santos invited tenders for our audit workduring 2005 and recently completed arigorous selection process. The Board willrecommend to shareholders at the AnnualGeneral Meeting that Ernst & Young beappointed to replace KPMG as statutoryauditors. We formally recognise Santos’ long audit relationship with KPMG and its antecedent firms.

Santos adopted the Australian equivalent of the International Financial ReportingStandards (AIFRS) from 1 January 2005, as required by all Australian companies. This is a major step towards standardisingaccounting practices around the world, which will provide greater transparency andincreased comparability between companies.

While the required changes to accountingpolicies will affect the way our financialaccounts are presented, they will not impactin any way on Santos’ business strategy,operations, cash flow, credit ratings orcapacity to pay fully franked dividends.

On behalf of the Board, I pay tribute to thecontribution of Mr Graeme McGregor whoretired as a Director in September 2005 after

six years on the Santos Board, and Mr PeterBarnett, who retired in February 2006 after10 years on the Santos Board. Graeme’s andPeter’s dedication and contributions to theworkings of the Board have been muchappreciated during a period of significantchange for Santos.

Ongoing renewal of the Board is a vital part of the governance process, especiallyconsidering the industry in which Santosoperates and the expanding nature and reach of the Company’s operations.

The Board was pleased to welcome Mr Ken Dean formerly from Shell and Mr Chris Recny from the internationalmanagement consultancy firm, L.E.K., as newNon-Executive Directors in February 2005.They are two high calibre individuals withstrong international oil and gas expertise and outstanding management experience.

The Board renewal process will continue and further appointments can be anticipatedduring the coming year.

On behalf of the Directors, I thank everyoneat Santos for their dedicated efforts and loyal contributions towards our outstanding2005 results.

The Board and the entire Santos team remain committed to building value for ourshareholders. The performance of the pastyear has us well placed to deliver in 2006 and beyond.

Stephen GerlachChairman15 March 2006

CHAIRMAN’S REVIEW

STRATEGY ON TRACK

Annual Report 2005


Annual Report 2005

Santos’ success in 2005 reflected theimplementation of our growth strategies,coupled with three key factors: people,product and prices.

Each contributed to the most successful year in Santos’ history, with record sales and profits, higher returns to shareholders, and excellent exploration and developmentresults.

I put people at the top of the list quitedeliberately. Without the energy, imaginationand commitment of a highly skilled andexperienced team, the other factors could not have contributed to the maximum extent possible.

Over the past year we have continued torealise more of the goals laid down five years ago in our renewal plan. Our pursuit of a balanced portfolio of assets and activitieshas achieved positive results both here andabroad.

A highlight of the year was the start-up,ahead of schedule and under budget, of theMutineer-Exeter oil project off the WesternAustralian coast, which was Santos’ firstmajor operated offshore oil project.

We have entered 2006 with a major step into the international energy marketplace by dispatching the first cargo of liquefiednatural gas (LNG) from the Bayu-Undanprocessing facility in Darwin.

In 2005, we complemented Santos’traditional gas production business by adding the Fairview coal seam gas reserves in Queensland to our eastern Australian gas business. We also completed a majorupgrading of the process control systems atour Moomba gas production hub in a project

which presented complex engineering and logistical challenges.

Taken together with new gas production from the John Brookes and Minerva fields –off the Western Australian and Victoriancoasts respectively – Santos is well placed to be a major long-term supplier to customershungry for energy with lower greenhouse gasemissions than competing fuels.

Our confidence in Santos becoming asignificant LNG exporter is underpinned by growing demand in major markets in South East Asia and the United States. Buyers are also keen to ensure their energysupplies by diversifying sources, at a timewhen some traditional sellers like Indonesiaare consuming more of their own productiondomestically.

In a world where political and securityuncertainty prevails, Australia is well regarded as a reliable trading partner.Santos is positioning itself to play a growingrole as a significant supplier to internationalenergy markets.

A defining feature of the year under reviewwas historically high prices for crude oil.There are a number of market indicators thatsuggest oil prices could remain robust intothe medium term.

Supply from some traditional sources in theMiddle East is slowing through dwindlingreserves or production interruptions in Iraqand a number of other traditional suppliers.While the supply side is constrained, growthin demand for crude oil continues unabatedwith China among the major drivers ofincreased petroleum consumption.

Such a market outlook for natural gas andcrude oil augurs well for Santos. We face

the future with enthusiasm, confident in the knowledge that our exploration and development strategies are deliveringsustainable growth for the Company, itsshareholders and employees.

A RECORD FINANCIAL PERFORMANCEHigher oil and gas prices, coupled withincreased hydrocarbon production fromexisting and new developments and a strongoperating performance, delivered recordfinancial results in 2005.

Santos achieved:

• sales revenue of $2.5 billion (up 64%over 2004)

• net profit of $762 million (up 115%)

• annual dividend of 38 cents per share (up 15%)

• netback, or margin, of $32 per barrel (up 50%)

• average crude oil price of $73.83 a barrel(up 42%)

• average natural gas price of $3.62 a gigajoule (up 10%).

These impressive results confirm that Santos’strategy of growing our core businesses,coupled with the pursuit of new oil and gasopportunities in Australia and overseas, isachieving its goal.

The maturing of Santos into a geographicallydiverse energy group is also shown by thechanging composition of our revenue andproduction results. A decade ago, ourtraditional Cooper Basin assets generatedthree-quarters of Santos’ annual productionand total sales revenue. In the past year,these assets produced 40% and 51% ofrevenue and production respectively.

5

MANAGING DIRECTOR’S REVIEW

RECORD YEAR CEMENTS PLATFORM FOR FUTURE GROWTH

‘SANTOS’ TRANSFORMATION HAS BEEN ACHIEVED

BY LIFTING OUR SIGHTS, GRASPING OPPORTUNITIES

AND APPLYING THE SKILLS AND EXPERIENCE REQUIRED

TO DELIVER SUSTAINABLE DEVELOPMENT PROJECTS.’


This transformation is proof of the merits of the course on which we are now travelling.It has been achieved by lifting our sights,grasping opportunities and applying the skills and experience required to deliversustainable development projects.

To that end, identifying good explorationtargets remains crucial to future success.

EXPLORATION EFFORT INTENSIFIESOur 2005 exploration effort deliveredsignificant results. In 2006, we are aiming even higher with one of the mostaggressive programs in Santos’ history.

In the past year we drilled 22 wildcatexploration wells and recorded sevendiscoveries. With a conversion rate of 32%, this result is well ahead of the oil and gassector’s average.

Successful drilling in Australia included gas discoveries with the Hurricane (offshoreWestern Australia), Henry (offshore Victoria),

and Yamala and Greenmount (easternQueensland) wells.

The Otway Basin off the Victorian coast hasbeen a source of much success for Santos with the Henry discovery continuing a 100%success rate in three successive wells in thearea. Gas from the Henry field will becommercialised by linking it to the nearbyCasino gas facility which came online early in 2006.

In a similar vein, the 2005 Caldita gasdiscovery in the Timor/Bonaparte region,offshore Northern Territory, is located about200 kilometres from the existing Bayu-Undaninfrastructure. It could potentially feed asecond processing train at the LNG plant in Darwin, depending on further appraisal.

In Indonesia, the gas and condensatediscovery at Hiu Aman in the Kutei Basin wasour first success from an attractive portfolioof exploration acreage that is well positioned

for future production. The massive Bontang LNG plant, in an adjoining province, is reported to be unable to meet contractcommitments because of shortages of gas supply.

In keeping with our practice of exploringfrontier areas with potential, Santos took its first steps towards a drilling program in Kyrgyzstan in 2005. We signed a jointventure agreement to earn an 80% share in10 exploration licences in the prospectiveFergana Basin in the west of the Central Asiancountry, formerly part of the Soviet Union.

A four-week field trip to Kyrgyzstan in 2005was an opportunity for a Santos team tobetter understand the local terrain, accessavailable seismic data and review the region’sgeology. After some reprocessing of existingdata we will conduct a seismic program in2006 to identify prospective oil targets, andexpect to drill our first well in that country in 2008.


Below left: LNG tanker docked at the Bayu-Undan LNGprocessing and load-out facility, Wickham Point, Darwin.

Below right: Ian Marks (right), and a Stolt pipelayoperator, inspecting operations aboard the Seaway Falconvessel, Casino project, offshore Victoria.


Santos’ 2006 program will see us drill a total of 310 wells – almost six wells a week –of which 25 will be wildcat exploration wells focusing on the Cooper Basin,Timor/Bonaparte region, Indonesia, Egypt and the United States.

The overall goal for our exploration programis to continue to produce the successes thathave generated strong petroleum reservereplacement ratios and underpinned our new development activities.

OUTSTANDING RESERVE REPLACEMENTAnother highlight in 2005 was Santos’excellent reserve replacement ratio of 218%,extending our three-year rolling averagereplacement ratio from all sources to 165%.

This reserves replacement performancepositions Santos with the world’s bestexploration and production companies. In the most recent reporting season in theUnited States, many of the major integratedand independent oil and gas companies failedto replace their production for the year; thatis to say, their replacement ratios were less than 100%.

For Santos, this is evidence that our growthstrategies are working. We have chosenprospective geological basins, worked hard to fully understand the regional geology and then secured large acreage positions to maximise drilling potential and returns.

FAST-TRACKING DEVELOPMENTSThe achievements of our developmentprograms, technical and marketing teams have successfully progressed a number ofprojects during the year.

Offshore Western Australia, the Mutineer-Exeter oil project was brought on stream three months ahead of schedule, 10% underbudget and with an excellent safety record.And the John Brookes gas and liquids project was fast-tracked with first productionoccurring just 18 months after the projectwas sanctioned.

The year also saw construction of the Casinogas project, offshore Victoria, with firstproduction, again ahead of schedule,occurring in January 2006. Completion of the Casino facility will enable rapidcommercialisation of the nearby Henry gas field discovered in 2005.

In Indonesia, Santos is aiming for earlydevelopment of the Jeruk oil discovery. Afterfurther seismic and appraisal drilling in 2005increased our understanding of the geology,we plan to undertake additional appraisaldrilling in 2006 to gain a more completepicture of the resource. Development studiesfor Jeruk will be carried out in parallel withdrilling activity in the current year.

Our cash flow from international activities will be bolstered in 2006 with the start-up of production from the Santos-operatedOyong oil and gas and Maleo gas fields in East Java, Indonesia.

RECORD PRODUCTION IN SIGHTDuring 2006, Santos expects to eclipse itsprevious highest annual production of 57.3mmboe. We came close to that peak in thepast year as new developments boostedproduction to 56.0 mmboe. Mutineer-Exeter(6.5 mmboe), John Brookes (1.1 mmboe) and Minerva (0.7 mmboe) made maidencontributions while Santos’ share of Bayu-Undan output lifted from 1.7 to 2.8 mmboe.

We expect total annual production of oil and gas in 2006 to top 60 mmboe. Withfurther developments pending both here and overseas, I am confident we will go on to set further records.

COOPER BASIN CONTINUES TO PERFORMStrong oil prices were also a factor in thedesign of the Cooper Oil Exploitation Programthat has been targeting undevelopedresources in this mature basin.

The latest 3D seismic technologies andinterpretation techniques have given us greater insights into the location anddevelopment potential of these relativelysmall but viable pools of crude oil.

In 2005, we had an 80% success rate from 29 wells drilled. In the current year, we will ramp up activity with three automatedtruck-mounted drilling rigs which have beenimported by Santos.

In an industry known for its innovation, the new rigs are self-levelling, therebyrequiring less site works and leaving a smallerenvironmental footprint to be rehabilitated.The rigs have operational safety advantagesand run at a lower unit cost thanconventional units.

With potential gross capital expenditure of up to $1.3 billion, the Cooper OilExploitation Program could see 1,000 wells,targeting 75 million barrels of oil, drilled over the next five years. Santos’ share of theprogram cost would be approximately $900million with the potential to add 50 millionbarrels to our reserves.

IMPROVED SAFETY PERFORMANCE Throughout Santos, we continue to drive a culture of awareness and responsibility of health, safety and the environment in all of our activities.

I am pleased to report further progress on this front. Santos’ safety record is muchimproved with our total recordable casefrequency rate – a measure of incidents – being reduced by around 50% in the pastthree years.

As an organisation, we believe that superiorsafety performance is primarily aboutprotecting the welfare of our employees. But it also translates directly into improvedbusiness performance.

These improved statistics represent thejourney that we are undertaking to ensurethat Santos has the necessary systems inplace to strive for, and achieve, continuousimprovement in everything that we do.

SUSTAINABILITY DELIVERS VALUEAt Santos, sustainability is becoming embeddedin the organisation and has a practicalbusiness edge.

7Annual Report 2005

MODEC Venture 11 FloatingProduction Storage and Offtake

vessel, Mutineer-Exeter oil fields.



With changed operating, energy andmaterials management systems withinSantos, we have saved:

• 1.7 million gigajoules of energy throughefficiency measures, enough to supplynatural gas to about 70,000 householdsannually

• 151,000 litres of water per urinal per year with the introduction of waterlessfacilities

• 2,000 kilowatt hours per month ofelectricity during a four-month ‘lights off’ trial on one floor alone of ourAdelaide office

• $23 million through a strategic sourcingprocess targeting key procurementarrangements that reduce the total cost of ownership to Santos and aresustainable over the long term.

I quote these simple examples to show that‘people power’ can make a substantial andenduring difference. This is behaviouralchange at its best.

Another achievement in 2005 was formalrecognition by the Self Insurers Group in

South Australia for the comprehensive audit process which forms part of Santos’Environment, Health and Safety ManagementSystem.

LEADERSHIP REQUIRED ON CLIMATE CHANGEThe biggest issue on the sustainabilityagenda is, of course, climate change. The weight of scientific evidence now clearly indicates that carbon dioxideconcentrations in the atmosphere areincreasing. Further, the rate of change of temperature that is likely to result fromthis increase in carbon dioxide is critical to the survival of the world as we know it.

The petroleum industry worldwide was shocked at the destruction wreaked byHurricane Katrina in the Gulf of Mexico lastyear. Production platforms designed towithstand a one-in-five-hundred-year weatherevent were severely damaged, some beyondrepair.

Such catastrophic weather events are thoughtto be due to an increased rate of globalwarming and there are severe business andsocial consequences that flow from theseclimatic events.

Natural gas is the lowest greenhouse gas emitting fossil fuel and I see it as thetransition fuel to future cleaner energysources. Gas gives us the time to maketechnological advances in efficiency andlower emissions in other energy sources.

I am a firm believer that there is not onequick fix; rather, we need to develop aportfolio approach to improve global energyefficiency and reduce greenhouse gasemissions.

In the short term we need to focus onconservation education, using techniquesthat are already in existence and, in parallel,invest research dollars wisely in clean energyand energy-efficient techniques.

We have to stop the current scattergunapproach to conservation and emissionresearch and, in the medium term, pool

our scarce resources. Education andtechnology developments should prevailbecause our long-term solution will requiretechnological breakthroughs.

An effective response to climate changerequires leadership by business andgovernment. Industry leaders need tocontribute to conservation education and behavioural change in the workplace,community and at home. We must continue as innovators in technology and improve the efficiency of energy sources.

Governments, at both Federal and Statelevels, must also show leadership. Australianeeds a clearly articulated energy plan for the future whereby all sources are regulatedequally. We cannot have a situation wheresome energy sources are subsidised whileothers are heavily taxed, as is currently the case.

Climate change is an issue affecting all of us. We must take action. There is no time to waste.

APPLAUDING OUR EMPLOYEESAs I indicated at the start of this review,Santos has a first-class workforce with theskills, drive and determination to take theCompany’s strategies and turn them intotangible successes.

I would like to record my appreciation for theexcellent outcomes achieved by our people in2005, and I look forward to being part of theSantos team that enthusiastically tackles thechallenges ahead.

John C Ellice-FlintManaging Director15 March 2006

Jim Forsyth and Steve Stehr, Mutineer-Exeter oilfields development.


9Annual Report 2005

Santos achieved strong results whenmeasured against a series of targetsestablished two years ago to measureperformance.

A 59% growth in earnings before interest,tax, depreciation, amortisation andexploration (EBITDAX) per share was achievedin 2005, well exceeding the target of greaterthan 10%. Similarly, Santos’ return on capitalof 20% outstripped the 10%+ target.

On the production front, output grew by 19%in 2005, or 8% when adjusted for the effect of the Moomba incident in 2004, against a target of 6–8% growth.

Higher oil prices and improved operatingefficiencies produced a netback, or marginper barrel, of $32, well over the $22 a barrel target.

Santos’ three-year rolling average reservereplacement ratio of 165% topped the target

of 140%. Although the three-year averagecost of replacing those reserves at US$8.71 a barrel was above the target cost of US$5.50a barrel, Santos’ performance comparedfavourably with industry averages.

The buoyant industry conditions which areresulting in an increased netback are alsoincreasing reserves replacement costs due to the competition for acreage, resources and equipment.

PRODUCTION GROWTH

EBITDAX GROWTH PER SHARE

RETURN ON CAPITAL EMPLOYED

RESERVE REPLACEMENT COST PER BOE***

RESERVE REPLACEMENT RATIO***

140% Target

165%Actual

>10% Target

59%Actual

>10% Target

20%Actual

US$5.50 Target

US$8.71 Actual

$22 Target

$32**

Actual

6-8% Target

19%* Actual

NETBACK

* If adjusted for the impact of the 2004 Moomba incident, growth would have been 8%.** If normalised for the A$45 oil price implicit in target, netback would have been approximately $22.*** Three-year rolling average.

2005 PERFORMANCE AGAINST TARGETS

MEETING STRATEGIC TARGETS



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Santos had a good year in 2005 from manyperspectives and this is particularly evident in the Company’s financial performance. The clearest indicator is that profits havemore than doubled in the past year driven by a 19% increase in production in a strongoil price environment.

RECORD PROFIT – UP 115%The headline net profit after tax of $762million increased 115% from $355 million in the previous year.

After removing the impact of significantitems, Santos’ underlying (normalised)profits increased by 107% to $639 million in 2005 from $309 million in 2004,underscoring the strength of the Company’soperating performance in 2005.

Significant items in 2005 added $123 millionto net profit after tax and included gains onreversal of prior period impairment losses,asset sales and additional insurancerecoveries, partly offset by accelerateddepreciation on East Spar and restructuringcosts.

In 2004, significant items added $46 millionto net profit after tax comprising mainlygains on asset sales partly offset byrestructuring costs.

OPERATING PERFORMANCE STRONGThe underlying profit result reflects not only the benefits of higher oil prices but alsoincreased production volumes and improvedoperating performance.

Earnings before interest, tax, depreciation,exploration and impairment (EBITDAX), ameasure of operating performance, increasedby 60%, about half of which was generated

‘SANTOS DELIVERED ON ITS STRATEGIC OBJECTIVES IN 2005, GROWING

PRODUCTION AND MARGIN WHILE CONTROLLING THE COST OF

REPLACEMENT AND USING THIS POSITIVE BALANCE TO GOOD EFFECT

IN PROGRESSING NEW DEVELOPMENTS AND INCREASING RESERVES.’

PETER WASOW CHIEF FINANCIAL OFFICER

DELIVERING RECORD FINANCIALPERFORMANCE

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PROFIT DOUBLES 2004–2005 $million

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from increased volumes and improvedoperating performance, and half from higheroil prices.

Production of 56 mmboe exceeded initialexpectations and was 19% higher than theprevious year, reflecting the contributionfrom new projects which added 9.4 mmboe, or about 17% of the year’s production. Of this, the Mutineer-Exeter developmentcontributed approximately 6.5 million barrelsto oil production.

Another feature of the year was acquisitionactivity which, net of divestments,contributed 2.3 mmboe of production.

Average gas prices continue to rise both in Australia and overseas contributing anadditional $95 million to EBITDAX.

Production cost increases not directlyattributable to volume increases totalled $28 million, with $17 million the result of achanging production mix. The remaining $11million reflects underlying cost increases andrepresents about 3% of production costs.

Being able to constrain production costincreases to only 3% in the currentenvironment was a good outcome. This is a direct result of the successful SantosContinuous Improvement Program which,after running for two years, was formallyconcluded at the end of 2005. Going forward,Santos expects ongoing benefits fromembedding a continuous improvement culture in all of its operations.

Taken together, increased production andhigher gas prices combined with good costdiscipline added $334 million to EBITDAX,which is 49% of the overall increase. Thesefactors, together with higher oil prices

resulted in Santos’ netback, or cash margin,increasing approximately 50% to $32 per boe.

Higher production volumes also drovedepletion and depreciation expense $86million higher although on a unit basis,depletion and depreciation were slightlylower at $10.02 per boe.

Exploration and evaluation expensedincreased to $204 million in 2005, drivenmainly by the larger exploration program and notwithstanding the continued positiveexploration success rate, as discussed onpage 17.

STRONG LONG-TERM CASH FLOWSantos continues to generate strongoperating cash flows and the improved 2005performance exceeded its decade-long recordof 12% compound annual growth in thisimportant measure.

But operating cash flow growth is only half of the picture, as it remains for Santos tocontinue to invest well. And on this score,

the Company can report positive results too.Proven reserve replacement which averaged165% of production has comfortablyexceeded Santos’ strategic target.

Average reserve replacement costs ofUS$8.71/boe, although higher than thetarget the Company set for itself, alsorepresents a very good result in the current competitive environment.

Santos continues to build for the future. In 2005, the record operating cash flow of$1,458 million more than funded theCompany’s $959 million capital expenditureprogram. Gearing increased slightly to 35% as a result the $612 million acquisition ofTipperary Corporation but remains withinCompany targets.

The capital investment program for 2006 is again set to increase to approximately$1,087 million.

400

600

800

1,000

1,200

1,400

1,600

OPERATING CASH FLOW GROWTH $million

12% compound annual growth

‘94

200

‘95 ‘96 ‘97 ‘98 ‘99 ‘00 ‘01 ‘02 ‘03 ‘04 ‘05

Tax change

Moomba incident



Santos continued its drive to delivermaximum value from its producing oil and gas assets during 2005 through a strategy of operational excellence.

This involves improving environment, health and safety performance; applying new technologies to reduce developmentcosts; achieving production and capital cost efficiencies; creating value frominfrastructure hubs and deliveringproduction.

Streaming new offshore and onshore projects and integrating acquisitions into the portfolio enabled Santos to boostproduction while improving its safety andenvironmental performance.

With about half its production now sourcedfrom outside the legacy Cooper Basin assets,Santos has continued with strategies such asproduction optimisation and trialling newtechnologies to maximise output from maturefields, while extending these concepts intonew areas of operation.

2005 PRODUCTION UP 19%Santos' total production in 2005 increased to 56.0 mmboe from 47.1 mmboe in 2004,primarily due to the start-up of a number of new growth projects and ongoingcontribution from the Cooper Basin.

Crude oil production was 60% higher at 15.3 million barrels, up from 9.5 millionbarrels in the previous year. This was largelydue to the successful early commissioning ofthe Mutineer-Exeter project, which contributed6.5 million barrels during the year.

Cooper Basin oil production increased by 19%during 2005 due to successful delineation,

development and production optimisation at several fields, particularly Merrimelia,Derrilyn, Carmina, Stimpee, Mulberry and Fly Lake.

Optimisation of production operations and an increased focus on water injection at Stag,offshore Carnarvon Basin, also increasedproduction from that field.

After three years of planning andimplementation, the Asset ControlEnhancement project at Moomba wascompleted during 2005. This state-of-the-artfacility upgrade provides a safer, morereliable and cost-effective process controlsystem, which will allow the Moomba plant to be better optimised to meet changing field and market requirements for the rest of its working life.

Gas production was steady or increased in fiveareas of operation, and overall sales gas andethane production increased by 4% duringthe year to 197.3 PJ from 190.5 PJ. Thisillustrates the success of Santos' continuedefforts to diversify its base business and tooptimise existing production.

There was a slight decline in gas productionfrom the Cooper Basin, while gas productionfrom the Carnarvon Basin decreased due tothe watering out of the East Spar field.

Higher production was achieved from easternQueensland through the development of theChurchie field and the addition of Fairview to the portfolio following the acquisition ofTipperary Corporation.

Santos also achieved higher gas production in Indonesia due to increased equity and inthe United States because of production

optimisation of the onshore Frio formationthrough fracture stimulation and wellrecompletions.

Gippsland Basin production increased as a result of Santos’ acquisition of furtherinterests at Patricia-Baleen.

Condensate production increased by 21% to 4.5 mmbbl from 3.7 mmbbl, reflecting a full year of production and a continuinggood performance from the Bayu-Undan gas recycle project in the Timor Sea and thereturn of full liquids recovery at Moomba. This was offset by production decline at EastSpar and the subsequent shut-in as the fieldreached the end of its production life.

LPG production almost doubled in 2005 to307,200 tonnes from 158,600 tonnes in 2004due to better performance from the CooperBasin and Bayu-Undan gas recycle project inthe Timor Sea.

STREAMING NEW PRODUCTIONThe Mutineer-Exeter oil field was broughtonline in March 2005. With facility uptime of 98% since start-up, the productionperformance in 2005 was ahead ofexpectations. Gross oil production ratesduring 2005 averaged approximately 70,000 barrels per day.

Santos formed a coal seam gas asset team in 2005 to manage the acquisition andsubsequent merger of Tipperary Corporation’sAustralian assets into Santos’ gas portfolio.

The world-class Fairview coal seam gas fieldwas integrated into Santos’ operations duringthe fourth quarter and production capacityhas increased by approximately 15% sincethis time. Additional development and

ACHIEVING OPERATIONAL EXCELLENCE

‘THE PRODUCTION GROWTH AND CHANGING PROFILE

DURING 2005 WAS THE RESULT OF SEVERAL OFFSHORE

DEVELOPMENTS COMING ON STREAM,THE INTEGRATION

OF ACQUIRED ASSETS,AND OUR CONTINUING EFFORTS

TO INTRODUCE NEW TECHNOLOGY TO CREATE VALUE

AND REDUCE COSTS.’

JON YOUNG EXECUTIVE VICE PRESIDENT OPERATIONS



optimisation is planned during 2006 tofurther enhance Santos’ eastern Australiangas market position.

Gas production from the Varanus Island hub,offshore Western Australia, increased duringthe year with the streaming of gas from theJohn Brookes field in September. This newfacility has a gross capacity of 240 TJ per dayand by year end was meeting all of Santos’existing gas contracts in Western Australia.

The offshore Bayu-Undan gas recycle projecthas continued to perform well since comingon stream in 2004. A planned shutdown earlyin 2005 provided an opportunity to carry outfurther process optimisation in addition toroutine maintenance and vessel statutoryinspections.

Gross liquid production improved to morethan 100,000 barrels per day. Uptime on theplant has been above expectations, leading to increased production performancethroughout the year.

APPLYING NEW TECHNOLOGIESSantos further tested new technologies in the Cooper Basin in drilling, completions and artificial lift optimisation during 2005 to improve product delivery and recovery,thereby reducing unit production costs.

Pinpoint fracture stimulation technology,introduced late in 2004, has now been used at 19 wells in the Cooper Basin withproduction improvements of more than 30% when compared to offset conventionalstimulated wells. Cycle time and costimprovements have also been achieved.

The Cooper Basin successfully saw the deepest and highest temperature use of thistechnology in the world. The application ofpinpoint fracture stimulation is now part ofSantos’ base business in the Cooper Basin,and its potential use in other Santos areas of operation is being progressed.

COOPER OIL EXPLOITATIONReservoir studies have identified that somelower permeability oil reservoirs may have

significant potential to increase recoveriesthrough activities such as additional infilldrilling, fracture stimulation andwaterflooding.

Santos successfully trialled a new program in the Cooper Basin during 2005 to increasethe oil recovery rate from known resources.The key is applying technologies such as 3Dseismic to better target the shallow oilreservoirs and automated drilling rigs toproduce the oil at a low unit cost.

Santos drilled 29 oil wells in the Cooper Basin during 2005 with an 80% success rate.This program, which is centred on low costappraisal and development campaigns, will be significantly increased in 2006 with thedrilling of up to 170 wells.

A state-of-the-art drilling rig was imported in 2005, with a further two to follow early in 2006.

These rigs are better for the environment asthey are self-levelling, dramatically reducingtheir footprint. They also operate more safelyand at a lower cost as they are automated,requiring less manual handling, with much of the work undertaken by smaller crewsoperating in air conditioned cabins.

Due to this fit-for-purpose design, the rigsare more mobile and can reduce the drillingcycle time, in turn delivering a step changereduction in drilling costs.

While the Cooper Basin is a maturehydrocarbon province, Santos is drilling wells which can be commercialised quicklyand cost-effectively, delivering strong cash flow which can be applied to othergrowth opportunities in this high oil price environment.

Grant Kinman inspecting Compressor Site #2, Fairview coal seam gas

field, Queensland.



PRODUCTION STATISTICS

Total 2005 Total 2004

Field units mmboe Field units mmboe

Sales gas and ethane (PJ)

Cooper 124.7 21.5 125.9 21.6

Surat/Denison 22.9 3.9 16.1 2.8

Amadeus 12.7 2.2 11.3 1.9

Otway/Gippsland 14.1 2.4 8.2 1.5

Carnarvon 7.7 1.3 17.7 3.0

Indonesia 4.6 0.8 2.1 0.4

United States 10.6 1.8 9.2 1.6

Total production 197.3 33.9 190.5 32.8

Total sales volume 228.2 39.3 207.1 35.6

Total sales revenue ($million) 825.7 680.1

Crude oil (‘000 bbls)

Cooper 3,205.9 3.2 2,685.5 2.7

Surat/Denison 74.5 0.1 90.2 0.1

Amadeus 196.4 0.2 236.5 0.2

Legendre 882.8 0.9 2,045.8 2.0

Thevenard 473.7 0.5 561.2 0.6

Barrow 760.1 0.7 859.3 0.9

Stag 2,363.9 2.4 2,124.8 2.1

Mutineer-Exeter 6,492.0 6.5 – –

Elang-Kakatua 184.1 0.2 226.7 0.2

Jabiru-Challis 164.4 0.1 176.7 0.2

Indonesia 138.3 0.1 68.0 0.1

SE Gobe 269.8 0.3 289.1 0.3

United States 58.0 0.1 171.7 0.2

Total production 15,263.9 15.3 9,535.5 9.5

Total sales volume 14,990.2 15.0 9,681.0 9.7

Total sales revenue ($million) 1,106.8 501.8

Total 2005 Total 2004

Field units mmboe Field units mmboe

Condensate (‘000 bbls)

Cooper 1,922.6 1.8 1,448.5 1.4

Surat/Denison 30.8 0.0 7.8 0.0

Amadeus 43.7 0.1 0.0 0.0

Otway 12.8 0.0 30.6 0.0

Carnarvon 101.5 0.1 775.5 0.7

Bonaparte 2,139.9 2.0 1,334.9 1.2

United States 236.1 0.2 114.4 0.1

Total production 4,487.4 4.2 3,711.7 3.5

Total sales volume 4,602.7 4.3 3,569.5 3.3


LPG (‘000 t)

Cooper 213.6 1.8 108.7 0.9

Surat/Denison 0.0 0.0 0.1 0.0

Bonaparte 93.6 0.8 49.8 0.4

Total production 307.2 2.6 158.6 1.3

Total sales volume 302.2 2.5 148.6 1.3


Total

Production (mmboe) 56.0 47.1

Sales volume (mmboe) 61.1 49.9

Sales revenue ($million) 2,462.8 1,500.9



CAPTURING NEW RESOURCES

‘OUR EXPLORERS HAD FURTHER SUCCESS IN 2005, RECORDING

SEVEN DISCOVERIES.THE CALDITA DISCOVERY STRENGTHENED

SANTOS’ POSITION IN THE TIMOR/BONAPARTE AND OUR

ENTRY INTO KYRGYZSTAN PROVIDES ANOTHER OPPORTUNITY

FOR INTERNATIONAL GROWTH THROUGH EXPLORATION.’

TREVOR BROWN VICE PRESIDENT GEOSCIENCE AND NEW VENTURES

Monique Warrington, Selina Donnelly and Jan Rindschwenter, interpreting seismic data.

A focused and material internationalexploration program is a crucial component of Santos’ growth strategy.

Santos’ 2005 exploration program yieldedfurther success in Australia and overseas,building on value generated in recent yearsand broadening the scope for the Company’sexpanding production profile.

Santos drilled 22 wildcat exploration wellsand recorded seven discoveries: a conversionrate of 32% which is ahead of the industryaverage, and follows Santos’ excellent 2004result of 44%.

A feature of the past year’s explorationprogram was the increasing proportion of targeted exploration areas outside of the traditional Cooper Basin acreage,including the Carnarvon Basin offshoreWestern Australia, the Gippsland and OtwayBasins offshore Victoria, the Bonaparte Basinin the Timor Sea, the Kutei and East JavaBasins offshore Indonesia and the Gulf ofSuez in Egypt.

AUSTRALIAN EXPLORATION SUCCESSSantos had wildcat exploration successoffshore Australia with discoveries at Henry,offshore Victoria, and Hurricane, offshoreWestern Australia.

The Henry 1 well, drilled in the Otway Basin by Santos as operator for the VIC/P44 jointventure, was a commercial gas discovery. TheHenry discovery made it a three-out-of-threesuccess rate for exploration wells drilled inthis block by the joint venture since Santosacquired a 50% interest and operatorship.

The commercialisation prospects for the Henry discovery are promising due to thegood quality of the gas and its proximity to the Casino gas field, which was broughtinto production early in 2006.

Santos added to its position in the SorellBasin, offshore Tasmania, during 2005 withthe award of permit T/40P. This block is inapproximately 200 metres of water and alongthe same trend as Santos’ other blocks in theOtway and Sorell Basins.

Further drilling is planned during 2006 at the Hurricane gas discovery in the CarnarvonBasin, with the potential to discover an oil leg.

The Yamala and Greenmount wildcat gasdiscoveries in eastern Queensland also addedto Santos’ portfolio of onshore developmentopportunities.

Another eight wildcat exploration wells areplanned in Santos’ existing core areas ofeastern and Western Australia during 2006,including four onshore, two in the CarnarvonBasin and two in the Otway Basin.

CALDITA DISCOVERY BOOSTS BONAPARTEPOTENTIALTogether with Indonesia, the TimorSea/Bonaparte Basin region is a priority on Santos’ list of emerging core areas. Asproduction has commenced at the Darwin LNG plant, the goal for exploration in thisregion is to prove sufficient additionalreserves to progress a potential brownfieldexpansion of these production facilities.

This program received a substantial boost in September 2005 when Santos and its co-venturer ConocoPhillips discovered asignificant new offshore gas field withdrilling of the Caldita 1 wildcat well about200 kilometres from the Bayu-Undanpipeline.

A further gas discovery was recorded atFirebird, which was drilled only ninekilometres from the Bayu-Undan field,although testing did not result in commercialhydrocarbon flow rates.

Late in 2005, Santos and ConocoPhillips wereawarded permit NT/P69 which is adjacent tothe Caldita discovery and contains the



Drilling $114.5 million

Geoscience and other $38.4 million

Seismic $21.8 million

New ventures $12.3 million

2005 EXPLORATION EXPENDITURE BY CATEGORY $million

Offshore Australia $29.4 million

Onshore Australia $21.3 million

South East Asia $40.0 million

Middle East/North Africa $45.5 million

United States $50.8 million

2005 EXPLORATION EXPENDITURE BY REGION $million

previously discovered Lynedoch gas resourcewhich has since been renamed Barossa.

Proposed new activities planned for thisregion during 2006 include a large 3D seismic survey covering up to 8,000 squarekilometres, designed to cover the Caldita,Barossa and Evans Shoal fields.

Santos also plans to drill an appraisal well in the Caldita field, a commitment well in the Barossa prospect and an exploration well in the Evans Shoal block.

INDONESIA YIELDS FURTHER SUCCESSSantos is the most active petroleumexploration company in Indonesia with largeacreage positions in the East Java and KuteiBasins.

Santos followed up the 2004 Jeruk oildiscovery in East Java with explorationsuccess in 2005 at the Hiu Aman 1 well drilledin the deep water Donggala PSC in the KuteiBasin, adjacent to the Bontang LNG plant.

This significant discovery was the highlight of six wildcat exploration wells drilled inIndonesia during the year. A furtherexploration well to test a separateaccumulation at Hiu Aman Selatan is planned in 2006.

In addition, Santos completed a 1,560 square kilometre 3D seismic survey in EastJava during 2005, which included the Jerukdiscovery and a number of other leads andprospects, several of which are now beingmatured for drilling during 2006 and beyond.

Santos’ expanding presence as a leader in thesearch for new Indonesian oil and gas fieldswill include the drilling of up to five wildcatwells in East Java during 2006 and up tothree wells in the Kutei Basin.

STRONG, WIDENING ACREAGE POSITIONSantos made a new country entry inKyrgyzstan during 2005 with a large acreageposition and a staged work program focusedon the under-explored but highly prospectiveFergana Basin.

This represents Santos’ first explorationventure in Central Asia and the Company will work with co-venturer Caspian Oil & Gastowards earning an 80% operated workinginterest in 10 exploration licences in theKyrgyz Republic.

This initiative is in line with Santos’ strategyof making a measured entry into areas whichthe Company believes are highly prospectivefor oil and gas and which provide theopportunity to deliver additional value toshareholders.

Santos will continue to review the regionalgeology and acquire seismic data during2006. The first well is scheduled for 2008.

Santos’ initial 2004 entry into the MiddleEast, based on a three-year program withDevon Energy in Egypt, is now more thanhalfway through the planned eight-wellprogram. Results to date have beendisappointing.

In the United States, Santos’ new ventureexploration plays are concentrated along theTexas Gulf Coast, targeting deep reservoirsand plays. A further four wildcat explorationwells are planned in this area during 2006.

The acquisition of Tipperary Corporation alsoadded an active coal seam gas pilot project inthe Lay Creek area of western Colorado,together with an active shallow gas play andearly production in eastern Colorado.

EXPANDED 2006 EXPLORATION EFFORTSantos’ exploration program will be furtherexpanded in 2006 with 25 wildcat explorationwells planned with a record explorationbudget of $225 million.

Santos will also progress appraisalopportunities such as the Jeruk oil field and the Caldita gas discovery.

0 500

kilom et re s

INDONESIAN EXPLORATION

East Java Basin3 wildcat wells in 20051,560 sq km 3D seismic survey5 wells planned in 2006

Kutei Basin3 wildcat wells in 2005Hiu Aman gas/condensate discovery3 wells planned in 2006

West Natuna Basin

West Papua



2006 WILDCAT EXPLORATION PROGRAM

Gulf of MexicoThunder 2, Kenedy Deep,Cougar L, Jaguar A

East Java Basin Banjar Panji, East Java (B, C & D), Merpati

Bowen BasinMosaic 1

Otway Basin Glenaire, Netherby 1

WA Basins Bricklanding, Fletcher

Bonaparte BasinEvans Shoal South, Barossa (Lynedoch)

Kutei Basin Kutei (A & B), Hiu Aman Selatan

GasOil

Gulf of SuezChinook, Simbel,Pawnee

Cooper/Eromanga BasinsLepard, Python, Montegue

Exploration drilling, offshore Otway Basin.



EXPANDING GLOBALLY THROUGHGROWTH PROJECTS

Development activities during 2005 providedfurther confirmation of Santos’ transitionfrom its traditional Australian base into aninternational upstream energy company.

In the most active year in the Company’shistory, development projects came on streamin Western Australian and Victorian waters,LNG export facilities were completed, and two projects in Indonesia were approved for development.

MUTINEER-EXETER A HIGHLIGHT The Mutineer-Exeter oil field in the CarnarvonBasin came into production three monthsahead of schedule, 10% under budget andwith an excellent safety record.

The accelerated start-up of Mutineer-Exeterwas possible because of the excellentdevelopment schedule achieved by Santos for the delivery of the Floating ProductionStorage and Offtake vessel and subseasystem.

The Mutineer-Exeter development, which is Santos’ first operated offshore oil project,achieved payback of the project capitalexpenditure within four months of start-up.

A further three development wells are plannedto be drilled on the Mutineer-Exeter fields in2006. Two appraisal wells are also plannedduring the next two years, with actual timingdependent on rig availability.

Mutineer-Exeter’s production history, and the results from previous appraisal anddevelopment drilling, led to an increase in the gross ultimate recovery expected from the field on a Proven plus Probable (2P) basisby 13.1 mmbbls to approximately 74 mmbbls.

BAYU-UNDAN TAKES SANTOS TO GLOBAL MARKETSThe first shipment of LNG from the Bayu-Undan processing plant in Darwinduring February 2006 was a major milestonefor Santos. It represented a significant step into the LNG business which is set

to play an increasing role in international energy markets.

The LNG phase of the project currentlyconsists of a single processing train with a design capacity of 3.5 million tonnes perannum. With the infrastructure now in place,and with environmental approval for up to 10 million tonnes per annum of processingcapacity at the Wickham Point facility, thefocus is on proving up the reserves base to progress a second train expansion.

Bayu-Undan’s offshore platform wascommissioned two years ago as a gas recycling project and continues to produceover 100,000 barrels of condensate and LPG per day.

JOHN BROOKES DELIVERSThe John Brookes gas project also exceededexpectations. Development and appraisaldrilling in 2005 resulted in Proven (1P)reserves upgrades of 44%. The liquids contentof the gas is around 11 barrels per millioncubic feet, which is double the estimate onwhich the project was sanctioned.

The project consists of three production wellsproducing to an unmanned wellhead platform,with raw gas sent via a 55-kilometre pipelineto the Varanus Island processing facility. After processing, sales gas is sent to mainlandWestern Australia via two 100-kilometrepipelines which connect into theDampier–Bunbury and Goldfields GasTransmission trunklines.

With gross 2P reserves of 1.3 trillion cubicfeet, John Brookes is a significant asset forSantos and presents further gas marketingand commercialisation opportunities.

‘TWO MAJOR GROWTH PROJECTS, MUTINEER-EXETER AND

JOHN BROOKES, STARTED PRODUCTION IN 2005 WHILE FOUR

OTHER OFFSHORE DEVELOPMENT PROJECTS WERE PROGRESSED,

WITH TWO NOW ON STREAM AND A FURTHER TWO TO START UP

IN THE NEXT 12 MONTHS.’

WILF LAMMERINK ACTING VICE PRESIDENT DEVELOPMENT PROJECTS AND TECHNICAL SERVICES

Seaway Falcon pipelay vessel off the coast of Port Campbell during development of the Casino gas project.



The John Brookes joint venture has alreadysigned contracts with three participants inWestern Australia’s electricity and miningsectors to supply a total of 407 PJ of gas over the next 20 years.

CASINO FAST-TRACKED TO PRODUCTIONThe Casino gas project in the Otway Basin,offshore Victoria, came on stream in early2006. It was another demonstration ofSantos’ ability to fast-track developmentswith first gas production achieved in recordtime of just over three years from discoveryand 17 months after sanction: the fastestoffshore gas development in Australianhistory.

As Santos’ first operated offshore gasdevelopment, the Casino project comprisestwo subsea production wells connected via a 46-kilometre pipeline to the TRUenergy-owned Iona onshore gas processing plant.

Commissioned ahead of schedule and within10% of its original budget, the Casino project– in which Santos has a 50% stake – opens up other development options in the area. The Henry gas field, discovered in 2005, will be commercialised with a tie-back to the adjacent Casino facility.

The entire gas reserves from the Casino fieldhave been sold under contract to energyretailer TRUenergy which will process the gas at its onshore Iona plant.

MINERVA GAS GOES DIRECTLY TO MARKETFirst production from the Minerva gas field, operated by BHP Billiton in Victoria’s OtwayBasin, took Santos into new territory as aretail marketer of gas.

During the year Minerva averaged grossproduction of about 120 TJ of gas per day andabout 350 barrels of condensate a day fromtwo subsea wells. The gas is piped to anonshore gas processing facility 10 kilometresaway near Port Campbell.

JERUK APPRAISAL CONTINUES The Jeruk oil discovery off the coast of East Java was made in 2004. The field wasappraised with a flow test early in 2005 andSantos moved quickly to acquire and interpret3D seismic and conduct further appraisaldrilling.

Santos will drill several more appraisal wellsduring 2006 while carrying out developmentstudies that are targeting early production.

As the field is located close to the coast ofJava in shallow water, in a region enjoyingbenign weather conditions, there are a rangeof possibilities for early production schemes.

OYONG UNDERWAYThe Oyong oil and gas project in East Java is being developed in two stages.

The phase 1 oil development comprises asimple wellhead structure with oil and gasprocessed on a nearby moored barge and the oil exported by tanker.

Solution gas associated with the early oilproduction will be reinjected until gasproduction begins.

The phase 2 gas development will involveconstruction of a 60-kilometre gas pipeline to PT Indonesia Power’s electricity generatingplant at Grati, East Java.

At the end of 2005, the oil phase wasapproximately 90% complete with initialproduction expected in mid 2006 and gasproduction expected to follow in 2007.

Santos, with a 40.5% share, operates theOyong field which was discovered in 2001. On a 2P basis, the field is estimated to contain 5 million barrels of oil and 86 billion cubicfeet of gas.

MALEO ON THE MOVEA gas sales agreement for the entireproduction of the Maleo gas field, over an 8–12 year field life, has underpinneddevelopment of this East Java project. Santoshas a 67.5% share of the project which willsupply up to 110 million cubic feet of gas perday to Indonesian electricity generators.

The Maleo project was approximately 40%complete at year end and is expected to come on stream in the second half of 2006.The project involves the conversion of a jack-up rig into a Mobile Offshore ProductionUnit together with construction of a shortpipeline to connect to existing productioninfrastructure in the area.

The Maleo field has gross 2P reserves of 240billion cubic feet of gas.

Mike Andronov, Staff Completion Engineer.



BROADENING COMMERCIALISATION HORIZONS

A strengthening political commitment to gasas a fuel for electricity generation producedseveral significant long-term sales contractsin 2005.

Santos’ commercialisation activities alsobroadened into new areas as an increasinglysophisticated marketplace offered innovativeprocessing and marketing opportunities.

SANTOS GAS FOR POWER GENERATIONSantos secured its third, and largest, salescontract for John Brookes gas in 2005 with an agreement to supply a 320 megawatt power station to be built at Kwinana inWestern Australia.

Announcing the contract, the WesternAustralian Government clearly signalled that it expects gas to play an increasing role inmeeting the state’s power needs. It statedthat natural gas is now regarded as a cheaper,cleaner fuel with significant climate changeadvantages, producing 50% fewer greenhousegas emissions.

The Kwinana contract is for 229 PJ of gas from John Brookes, a joint venture with Apache, over 15 years. It builds on earlieragreements to supply 58 PJ over 20 years and120 PJ over 15 years to the West Kimberleypower project and Telfer gold minerespectively.

Across the continent, Santos also secured a10-year contract to supply 45 PJ of gas to the450 megawatt power station being built atBraemar in south-east Queensland. First gasdeliveries from Santos’ eastern Queenslandfields are expected in 2006.

Santos is strengthening its position amongQueensland’s electricity generators and,

with the latest contract, will be supplyingthree of the state’s largest gas-fired powerstations: Braemar and Swanbank E nearIpswich and Mica Creek at Mount Isa.

BENEFITS FLOW FROM NEWINFRASTRUCTURE POSITIONS Santos entered a number of arrangements in 2005 that aim to match hydrocarbonreserves with the most efficient use ofprocessing infrastructure.

So-called toll processing – under which theprocessor is paid a fee, or toll, for handlinganother company’s oil or gas – has thepotential to add greater flexibility and speedin bringing product to market. Toll processingalso adds value to Santos’ productionactivities by increasing the use ofinfrastructure and, potentially, lengtheningthe productive life of those assets.

Following the full acquisition in 2005 of thePatricia-Baleen production infrastructure in the Gippsland Basin, Santos negotiated a contract to process up to 350 PJ of gas over10 years from Nexus Energy’s nearby Longtomfield. The contract is conditional on sufficient gas being found at Longtom with an appraisal well planned for mid 2006.

Santos negotiated an agreement for theprocessing of gas and liquids from its interest in the Kipper project through Essoand BHP Billiton’s onshore facilities in theGippsland area.

The Kipper field, which is estimated to contain 2P reserves of 620 billion cubic feet of recoverable gas and 30 million barrels ofcondensate and LPG, is expected to come onstream in 2009.

In the Cooper Basin, Santos negotiated to buygas from Great Artesian Oil and Gas’ Smegsydiscovery. While a relatively small contract,Santos’ first purchase of raw gas from a thirdparty adds another marketing and revenuedimension to the Moomba gas hub.

Santos also signed a number of liquidsprocessing agreements with oil producers in the Cooper Basin, taking third party oilvolume handled by the Company to around6,000 barrels a day in 2005. The transport,processing and marketing of third party oiladds value to and greater use of the Moombafacilities.

NEW STEP INTO DIRECT SALESSantos added a new element to its gasactivities with the first retail sales of gas by Santos Direct, which was awarded a retailgas licence in 2005. Santos Direct is sellingthe Company’s 10% share of output from theMinerva gas field to industrial customers and the spot market in Victoria.

The new marketing arm made a successfuldebut in a competitive marketplace, selling an average of 13 TJ a day. Santos Direct is now well positioned to expand its gas sales as other supply options become available.

MALEO SELLS LIFE-TIME PRODUCTIONInternational commercialisation activitiestook a significant step forward with thesigning of a long-term contract for the sale of the entire production of the 67.5%Santos-owned Maleo gas field in East Java.

The Maleo contract, to supply Indonesia’sleading natural gas utility, PT Perusahaan Gas Negara, will generate more than $700million over the 8–12 year life of the project.

‘SANTOS HAS CAPITALISED ON THE OPPORTUNITIES PROVIDED

BY SIX STRATEGICALLY-PLACED INFRASTRUCTURE HUBS

AROUND AUSTRALIA, DELIVERING INNOVATIVE CONTRACTS

TO MEET THE ENERGY NEEDS OF OUR CUSTOMERS.’

RICK WILKINSON VICE PRESIDENT GAS MARKETING AND COMMERCIALISATION



N

First production from Maleo, which isestimated to contain gross 2P reserves of about 240 billion cubic feet of gas, is expected in the second half of 2006.

MARKETING ALLIANCE BENEFICIALSantos’ oil trading arrangement with BP Singapore, under which BP markets all of Santos’ oil output, produced excellentresults with above average prices realised in a surging international market.

Established in 2004, the alliance with BPensured that maiden oil production from the Mutineer-Exeter field, which came on-stream as one of the developmenthighlights of 2005, was efficiently and expeditiously taken to market.

BP was also responsible for the marketing of liquids from the Cooper Basin and the Legendre crude oil field in the Carnarvon Basin.

BP has added value to Santos’ marketingefforts through its global network of tradinghouses, providing access to worldwidemarketing information and internal refinerycapacity, and an entrée to niche marketingopportunities.

Above: John Brookes gas development.

Below: Belinda Wells and Barry Edwardsinspecting the Scotia coal seam gas facility, Queensland.



REALISING VALUE AND BALANCING THE PORTFOLIO

The Strategic Projects team focuses onderiving value from Santos’ undevelopedcontingent resources and balancing theportfolio of assets.

Santos made several strategic acquisitions in 2005 that improved its position as one of the largest suppliers of gas to easternAustralian markets.

STRATEGIC ACQUISITIONS The largest acquisition of gas assets was the US$466 million (A$612 million) purchaseof US-based Tipperary Corporation whichincluded a 75% working interest in theFairview coal seam gas field, located nearRoma in Queensland’s Bowen Basin.

The Fairview field is a world-class quality coal seam gas resource which is well locatedin relation to infrastructure and the easternAustralian gas markets.

Net 2P reserves of 830 PJ (143 mmboe) were booked at the end of 2005. Additionalpotential exists in the large pool of contingentresources and by virtue of more than 4,000square kilometres of exploration acreage.

Together with Santos’ existing coal seam gasfield at Scotia, in Queensland’s Surat Basin,and conventional gas interests in the Cooper,Surat, Otway and Gippsland Basins and inPapua New Guinea, the Company is wellpositioned in all the current and potential gas supply regions to the eastern seaboard.

BENEFITS ACHIEVED FROM FULLOWNERSHIPSantos also consolidated its position in theemerging gas supply hub of the GippslandBasin, offshore Victoria, with the acquisitionof the remaining 50% interests in thePatricia-Baleen and Sole gas fieldsrespectively.

The purchases, giving Santos 100% of the two fields, occurred in two stages withacquisitions from Basin Oil, which held OMVPetroleum’s Gippsland Basin assets (40% ofeach field), and Trinity Gas Resources (10%).

After acquiring full ownership of the Patricia-Baleen production infrastructure,Santos negotiated a conditional contract to process gas from Nexus Energy’s nearbyLongtom gas field.

The agreement, conditional on sufficientreserves being proved at the Longtom fieldwith additional drilling, would add value tothe Patricia-Baleen development through theprocessing fee paid by Nexus, the utilisationof excess capacity, and a possible extensionof the productive life of the facility.

ADDING VALUE THROUGH DIVESTMENTSMaintaining a balanced portfolio ofexploration and development assets alsorequires regular reviews of non-performingassets or interests that no longer fit well with Santos’ core activities.

During 2005, Santos sold its 25% interest inthe Timor Sea exploration permit JPDA 03-01in the Joint Petroleum Development Areabetween Australia and Timor Leste, whichcontains the undeveloped Jahal and Kuda Tasi oil fields.

The sale of the Timor Sea assets to British oiland gas group Paladin Resources generated anet gain of $16.3 million. Santos will, undercertain circumstances, also receive up toUS$3 million should an oil field be developedin the permit area in the future.

Santos also sold its 100% interest in theundeveloped Golden Beach gas field in theoffshore Gippsland Basin to Cape EnergyGroup in 2005.

The flexibility to divest this non-core assetcame from Santos’ acquisition of theremaining 33% interest in Golden Beachthrough the purchase of OMV’s GippslandBasin assets earlier in the year.

However, again with a view to adding value to core activities, the sale agreementincluded a provision that Santos is able topurchase up to 44 PJ of gas when the GoldenBeach field is developed.

The Golden Beach agreement will add anothersupply option to Santos’ gas marketing arm,Santos Direct.

The ongoing rationalisation of non-coreassets generated cash flow of $109.7 millionin 2005 (2004: $39.9 million), principallycomprising the sale of Santos’ interests in the Jahal and Kuda Tasi oil fields in the Timor Sea and receipt of the proceeds from

the 2004 sale of the Company’s interest in the Carpentaria Gas Pipeline.

APPLYING TECHNOLOGY TO TIGHT GASSantos has identified several newtechnologies which have the potential tocommercialise significant quantities of thelarge tight gas resource, which arehydrocarbons contained in traps with poorpermeability, identified in the Cooper Basin.

Six projects to test these technologies are in the process of development andimplementation during 2006 and 2007.

UNLOCKING VALUE FROM CONTINGENTRESOURCESLiberating value from Santos’ contingentresources continues to be a priority.

In the Timor/Bonaparte region, Santos and its co-venturers are focused on provingsufficient additional resources to allow theconstruction of a second LNG train at theDarwin plant.

In Papua New Guinea, Santos has a 25%interest in the Hides gas and condensate fieldwhich underpins the gas volumes required forthe proposed PNG gas project.

Santos is continuing to undertake duediligence on the PNG gas project and isengaged in discussions and negotiations withthe project operator and other stakeholders.



Northern Australia 816 mmboe

Western Australia 72 mmboe

Central Australia 586 mmboe

Southern Australia 43 mmboe

Papua New Guinea 391 mmboe

2005 CONTINGENT RESOURCES mmboe

Indonesia 63 mmboe

Darwin LNG processing and load-out facility.


Annual Report 2005

GROWING THE SIZE AND VALUE OF RESERVES

Santos added 122 mmboe of Proven (1P)reserves in the year to 31 December 2005.

1P reserves at the end of the year, after production of 56 mmboe and afterdivestments, were 414 mmboe, up from 348 mmboe at the end of 2004.

For the fourth consecutive year, thereplacement of 1P reserves exceeded Santos’total production. The replacement rate for 1P reserves was 218% in 2005 and averaged165% over the past three years, whichcompares very favourably with othersuccessful companies on a global basis.

After backing out the impact of acquisitionsand divestments, Santos’ 2005 1P organicreserve replacement ratio was 123%, and the three-year average was 121%.

Proven plus Probable (2P) reserves also rosesharply, with the addition of 187 mmboe priorto production. After allowing for production,2P reserves rose by 131 mmboe to 774mmboe, up from 643 mmboe a year earlier,which represents a reserves replacement rate of 334%.

The 2005 reserves figures do not include anypotential reserve bookings for the Jeruk oildiscovery in the Sampang PSC in East Java,the Hiu Aman oil and gas discovery in theDonggala PSC in the Kutei Basin, offshoreEast Kalimantan or the Caldita gas discoveryin the Bonaparte Basin, offshore NorthernTerritory. These discoveries are currentlycarried as contingent resources.

The average 1P reserve replacement cost for 2005 was US$9.04 per boe. Replacementcosts in any one year are affected by thetiming of spending and reserve bookings,

so a three-year average is a more reliableindicator of costs. Santos’ averagereplacement cost of US$8.71 per boecontinues to be world competitive.

As a result of Santos’ major developmentfocus over several years, the proportion ofdeveloped reserves has steadily increased,with 77% of 1P reserves and 62% of 2Preserves now in the developed category, as shown in the graph below.

RESERVE MOVEMENTSThe material movements in reserves duringthe year were as follows:

• Cooper Basin – revisions to both oil andgas reserves in existing Cooper Basinfields added 16.8 mmboe of 1P reserves.In the 2P category, negative revisions ingas reserves of 4.6 mmboe were offset byincreases in oil reserves of 4.9 mmboe.

The acquisition of Basin Oil from OMVPetroleum resulted in an increase of 2.1 mmboe of 1P and 4.9 mmboe of 2P reserves in the South Australian Cooper Basin.

• Eastern Queensland – reserves werebooked at the Fairview coal seam gasfield following the acquisition ofTipperary Corporation in October 2005.Year end bookings of 49.6 mmboe of 1P and 142.6 mmboe of 2P reserves were recorded based on an independentestimate undertaken by NetherlandSewell and Associates.

Also in eastern Queensland, revisions to existing fields added some 4.1 mmboeof 1P and 4.4 mmboe of 2P reserves.

• Southern Australia – successful appraisalof the Casino field in the Otway Basinresulted in the addition of 6.0 mmboe of 1P reserves and 2.0 mmboe of 2Preserves. The discovery of the nearbyHenry field added 5.4 mmboe of 1P and11.1 mmboe of 2P reserves.

In the Gippsland Basin, the acquisition of the OMV Petroleum and Trinity GasResources interests in the Patricia-Baleenfield added 2.6 mmboe of 1P and 4.3mmboe of 2P reserves.

• Carnarvon Basin – successfuldevelopment and appraisal activity at the John Brookes field resulted in anincrease of 25.5 mmboe of 1P and 10.4mmboe of 2P reserves.

At Mutineer-Exeter, positive reservoirperformance and appraisal increased 1Preserves by 7.1 mmboe and 2P reserves by 4.3 mmboe, excluding the impact of2005 production.

A positive revision was recorded atLegendre-Thevenard of 1.8 mmboe of 1Pand 1.5 mmboe of 2P reserves. At EastSpar, the remaining reserves of 1.1mmboe of 1P and 3.6 mmboe of 2Preserves were written-off following thewatering out of the field.

• Indonesia – minor adds to the Maleo andKakap fields of 1.0 mmboe of 1P and 1.2mmboe of 2P in aggregate were offset byreduced reserves at Oyong of 2.6 mmboeof 1P and 3.5 mmboe of 2P followingdevelopment drilling.

The 10% government back-in to theMaleo field resulted in the divestment of 1.0 mmboe of 1P and 3.0 mmboe of 2P reserves.

Contingent Resources (best estimate) were1,971 mmboe at the end of 2005, an increaseof 528 mmboe (37%) relative to the previous year.

This significant increase is largely due to thebooking of additional coal seam gas resourcesat Fairview and in the Roma area, togetherwith exploration success at Caldita in theTimor/Bonaparte area and Hiu Aman offshore Indonesia.1P Reserves

2005 2003 2004 2002

PERCENTAGE OF 1P AND 2P RESERVES DEVELOPED %

2P Reserves

0

20

40

60

80

100

26


PROVEN PLUS PROBABLE RESERVES (SANTOS SHARE) BY ACTIVITY

Sales gas Crude oil Condensate LPG Total(incl. ethane) mmbbl mmbbl '000 mmboe

PJ tonnes

Reserves year end 2004 2,873 74 49 3,523 643Production -197 -15 -4 -307 -56Additions 68 0 0 0 12Acquisitions/Divestments 863 0 0 40 149Revisions 60 17 -2 -61 26Estimated reserves year end 2005 3,667 76 43 3,195 774

PROVEN PLUS PROBABLE RESERVES (SANTOS SHARE) YEAR END 2005 BY AREA(mmboe)

Area Sales gas Crude oil Condensate LPG Total(incl. ethane) mmbbl mmbbl '000 mmboe

PJ tonnes

Cooper Basin 933 25 12 1,560 210Onshore Northern Territory 135 2 1 0 26Offshore Northern Territory 322 1 24 1,439 91Eastern Queensland 1,089 0 0 20 188Southern Australia 359 0 2 176 65Carnarvon Australia 589 44 3 0 148Papua New Guinea 0 1 0 0 1Indonesia 210 3 0 0 39United States 30 0 1 0 6

Total 3,667 76 43 3,195 774

RESERVES SUMMARY (SANTOS SHARE)(mmboe) Year End Production Revisions Additions Acq/Divest Year End

2004 2005

Proven (1P) 348 -56 63 6 53 414Proven plus Probable (2P) 643 -56 26 12 149 774Contingent Resources (Best Estimate) 1,443 0 44 401 83 1,971


DEFINING RESERVESSantos has in place an evaluation andreporting process that is in line withinternational industry practice and is ingeneral conformity with reserves definitionsand resource classification systems publishedby the Society of Petroleum Engineers (SPE),World Petroleum Congress (WPC) and theAmerican Association of Petroleum Geologists(AAPG). The definitions used are consistentwith the requirements of the Australian StockExchange Ltd (ASX).

Reserves are defined as those quantities of petroleum which are anticipated to be commercially recovered from knownaccumulations from a given date forward.Santos reports reserves net of the gasrequired for processing and transportation to the customer. Reserves reported are basedon, and accurately reflect, informationcompiled by full-time employees of theCompany who have the requisitequalifications and experience prescribed by the ASX Listing Rules.

EXTERNALLY REVIEWED BOOKING PROCESSSantos’ reserves processes and procedureswere reviewed by independent expert,Gaffney, Cline & Associates, and found to be ‘appropriate to providing robust estimatesof Santos’ reserve position in accordance withinternational industry practice’.



MANAGING FOR LONG-TERMSUSTAINABILITY

As a successful energy company, Santos mustbe able to uphold its reputation as a trustedand competent explorer and operator,continuing to make economic progress whileoperating in an environmentally responsiblemanner and fulfilling its social obligations.

Over the past year, significant efforts havebeen made to continue the process ofintegrating the principles of sustainabilityinto Santos’ decision-making and operationalpractices. As a result, Santos has recordedsome of its best results for many of itssustainability indicators, includingenvironment, health, safety and greenhouse.

FRAMEWORK FOR SUSTAINABILITYMANAGEMENTSantos’ commitment to sustainability ismanaged through the functionally-basedorganisation structure which reflects thevarious activities that occur throughout the business cycle of the Company.

Santos’ ‘conveyor belt’ model fromexploration to commercialisation,development and operations is supported by efficient support services that ensureoperationally-focused areas are geared to achieve performance across the followingfour sustainability domains:

• Environmental management – the efficiency and effectiveness of how Santos uses natural resources.

• Santos’ people – the wellbeing, skills and capabilities of employees.

• Community development – Santos’ contribution to developing and sustainingthe communities it is part of.

• Economy prosperity – Santos’ economic contribution to the communities it is part of.

Santos is taking a long-term view of thesustainability of its business activities and

assesses and measures sustainabilityperformance for each functional area.

Santos applies a systematic approach tomanaging its operations. Aspirations andcommitments are communicated throughpolicies and management systems to ensurethe appropriate results are achieved.

Measurement and reporting performance form the start of the continuous improvementloop. Details on performance against targets,commitments and aspirations will be includedin detail in the sustainability report which willbe issued later in the year.

REVIEWING SYSTEMS AND POLICIESSantos has in place a number of policies andprocedures that set out the responsibilitiesand systems to guide the actions of theCompany and employees in all the areas of the business.

During the year a number of policies werereviewed and updated to reflect best practice

‘SANTOS MADE GOOD PROGRESS DURING 2005 EMBEDDING THE

PRINCIPLES AND PRACTICES OF SUSTAINABILITY INTO THE MANY

ASPECTS OF OUR BUSINESS THROUGH A STRUCTURED PROCESS

OF IMPROVEMENT, MEASUREMENT AND REPORTING.’

MARTYN EAMES VICE PRESIDENT CORPORATE AND PEOPLE

Sustainability In place/In development

Environment ✔

Safety ✔

Health and wellbeing ✔

Training and development ✔

Human rights ▲

Community ▲

Greenhouse ✔

Business In place/Conduct In development

Conflict of interest ✔

Receiving gifts ✔

Bribery and corruption ✔

Financial management and accounting ✔

Risk management ✔

Securities dealing ✔

Shareholder communication and market disclosure ✔

Political affiliation ✔

Reporting misconduct ✔

Workplace In place/and Employment In development

Recruitment ✔

Issue resolution ✔

Employee benefits ✔

Performance management ✔

Leave ✔

Equal opportunity ✔

Use of company resources ✔

Confidentiality ✔

Privacy ✔

Internet and electronic communication ✔

Conditions of employment ✔

EXAMPLES OF SANTOS SYSTEMS AND POLICIES

In place: ✔ Formal integrated policy in development: ▲



among industry leaders and other formalintegrated policies are in the process of beingfinalised. The table on page 28 summarisesthe areas covered by these policies andcurrent status.

One of Santos’ systems is a comprehensiveEnvironment, Health and Safety ManagementSystem used to define performanceexpectations and accountabilities, and tomonitor and continually improveperformance.

The Self Insurers Group in South Australiaformally recognised Santos during 2005 for its establishment of the audit process whichforms part of this system. Santos developedthis process and it is in part based on industrybest practice models.

More detail about this and the other systemsSantos has in place can be found in theCorporate Governance section which beginson page 34.

2005 PERFORMANCE AND STATISTICSHealth and safety improves

Santos’ safety vision is that ‘we all go homefrom work without injury and illness’ and theCompany remains committed to continuallyimproving its safety performance.

The 2005 result is the best Santos has everachieved, with a total recordable casefrequency rate of 4.9. This means that therewere 4.9 lost time plus medical treatmentinjuries for every million hours worked andrepresents a 50% reduction over the pastthree years.

One of the most pleasing safety outcomes for2005 is that there were no cases of heat stress

requiring medical intervention. Many Santosemployees work in the harsh arid environmentof the Cooper Basin where temperaturesregularly reach over 40°C in the summermonths and the potential for heat stress isgreat. Santos has made a significant effort ineducating employees about how to avoid heatstress and equipping them to do this.

Santos was acknowledged for its improvementin safety performance by the AustralianPetroleum Production and ExplorationAssociation, which nominated Santos as a finalist for its industry-wide awards.

Santos’ own internal award system, theDirectors’ Environment, Health and SafetyAwards, was conducted for the second time in2005. Entries were received from 29 teams forconsideration in six categories: Best OverallEnvironment Performance, Best Overall Healthand Safety Performance, Best Overall Healthand Safety Performance by Santos Contractor,Best Environmental Project or Innovation andBest Health and Safety Project or Innovation.

Oil spills decrease

Santos’ oil spill prevention strategy continuedto be a major focus in 2005 and for the secondyear in a row the Company reduced the volumeof spills during the year.

In 2006, Santos will also focus on reducing the number of oil spills as well as volume. A continual reduction in the number of oilspills will reduce the chance of significantspill volumes over time.

Coongie Lakes National Park declared

A proud moment for Santos in June 2005 wasthe declaration of the Coongie Lakes area as a

National Park by the South AustralianGovernment at a special ceremony held on the banks of the Coongie Lakes at dawn.

The Coongie Lakes wetland system, locatedwithin the central Australia oil and gas fieldsoperated by Santos, is home to an abundanceof wildlife, fish, turtles, frogs and othermammals and importantly provides a refugeduring drought.

Santos played a key role in securing the future of this important environmental icon by brokering a Memorandum of Understandingwith South Australian conservation groupswhich recommended permanent protection for the Coongie Lakes area by excluding newpetroleum activity from the area.

The Coongie Lakes National Park is testamentto Santos’ commitment to responsibleenvironmental management. The leadershipposition taken by the Company wasinstrumental in securing the long-termprotection of this vital arid wetland.

Developing and rewarding people

The investment Santos makes in its people isfocused on ensuring the best available talentis identified and developed to support arapidly-growing, high-performing business.

The strategy is supported by competitiveremuneration and rewards that recognise anddifferentiate performance and is underpinnedby a working environment that supportsSantos’ values and the wellbeing of all staff.

Santos has two Enterprise Agreementsoperating within Australia which provide aframework for the parties to develop andimplement improvements in work practices,

0

3

6

9

12

15

TOTAL RECORDABLE CASE FREQUENCY RATE TRCFR per million hours worked

Santos employee

2003 2004 2005 2002

Contractor Combined

0

390

780

1170

1560

1950

OIL SPILL VOLUMES m3

Lytton oil spill effect

2003 2004 2005 2002



Total

United States Business

Indonesia Business

Corporate

Finance

Operations

Development Projects and Technical Services

Strategic Projects

Gas Marketing and Commercialisation

Geoscience and New Ventures

EMPLOYEE GENDER BY FUNCTION

Female Male

24% 76%

32% 68%

8% 92%

22% 78%

9% 91%

33% 67%

48% 52%

30% 70%

46% 54%

20% 80%

Safety exercise simulating an offshore rig evacuation.



skills and technology, while increasing jobsatisfaction in an increasingly challengingenvironment.

This framework provided a basis for achievinga program of voluntary redundancies in thefield, identified as part of the SantosContinuous Improvement Program in 2004.

No time was lost at Santos during 2005 due to industrial stoppage.

Santos invested approximately $3,000 per person during 2005 on training anddevelopment designed to develop technical and business capability. This training includeda focus on field appraisal and development,integrated basin analysis, deep watersedimentation, safety and frontline leadership.

A further $2.8 million was invested to takeSantos’ Competency Based Training model tothe next stage at Australian field locations.This training is linked to the NationalCompetency Framework and collaborativeefforts involving field employees havesignificantly improved Santos’ development of on-the-job skills.

Santos’ gender profile reflects thepredominantly male workforce in trades,engineering and science. The Company isinvolved in programs to improve genderbalance; for example, the Premier of SouthAustralia’s Industry Awards for Teachers ofScience & Mathematics, and the GeosciencePathways project, which help secondarystudents better understand the applicationsof science and mathematics in business,thereby encouraging careers in thesedisciplines.

Voluntary employee turnover is relativelystable, especially considering the competitivenature of the oil and gas industry and theworldwide demand for skilled resources.

The majority of Santos’ employees are locatedin South Australia due to the significantCooper Basin operations and the Adelaide-based corporate and business services thatsupport Santos’ assets in Australia andoverseas.

BUILDING THE RIGHT CULTURE In 2005 Santos continued a program ofactivities to ensure that the way employeesand business partners work togetherenhances Santos’ ability to be successful.

More than 1,200 employees participated in aseries of one-day forums during the year thatexamined the data that were gathered from asurvey of employees about cultural issueswhich was conducted in late 2004. Employeeswere encouraged to contribute ideas forimprovement, and action has now been takenon a number of fronts.

These forums also provided an opportunity todiscuss Santos’ vision, strategy and values

(see inside front cover flap) in a comprehensivemanner. The purpose of this was to broadenemployees’ knowledge of the business and the part they have to play in getting the right results.

Three culture project teams covering Vision,Values, Strategy and Communication;Leadership and Change; and PersonalDevelopment and Training were establishedand presented recommendations which willnow form the basis for planning andestablishing Santos’ approach to culturedevelopment in the future.

INVESTING IN COMMUNITIESSantos has formed relationships with themany communities in which it has operationsand recognises that it has a responsibility tocontribute to the health and wellbeing ofthose communities.

This is achieved in part through a wellestablished sponsorship and donationsprogram and in 2005 Santos contributed over $3 million to more than 120 events andorganisations in South Australia, the NorthernTerritory, Queensland, Victoria, Indonesia andthe United States.

In 2005 Santos also continued its support of the Adelaide Symphony Orchestra, theAustralian School of Petroleum at theUniversity of Adelaide and the SouthAustralian Museum.

South Australia 71%

Queensland 14%

Western Australia 2%

Northern Territory 2%

Victoria 1%

United States 3%

Indonesia 7%

LOCATION OF EMPLOYEES %

0

2

4

6

8

10

VOLUNTARY EMPLOYEE TURNOVER %

2003 2004 2005 2002



Asian tsunami

The devastation caused by the Asian Tsunamiwhich struck on Boxing Day 2004 was atragedy of incomprehensible magnitude.

Santos and its employees together respondedto the aid effort and the Company matcheddollar for dollar the employee contributions.

Almost $200,000 was contributed to ninedifferent aid agencies in this manner. Inaddition, Santos has pledged $250,000 to a redevelopment project in Indonesia and is working with Red Cross Australia to identifya suitable project.

Santos Community Fund

The Santos Community Fund makescontributions to a wide range of communityorganisations that are in turn supported bythe efforts of Santos employees who chooseto contribute their own time and resources to improving their community.

Among the recipients in 2005 was the RoyalFlying Doctor Service, which Santos hassupported for more than 20 years; CampQuality; the Juvenile Diabetes ResearchFoundation; and Oxfam.

Santos also contributed to the Our Patchproject in Adelaide for the second year. This is a joint initiative of the Patawalonga andTorrens Catchment Management Boards andthe Adelaide City Council in which Santosemployees volunteer in a program torehabilitate a section of the River Torrens.

Crescent Moon

Santos has been a long-time supporter of the arts as a way of bringing new ideas,perspectives and cultures to the widerAustralian community.

In 2005 the Company was the major sponsorof Crescent Moon: Islamic Art and Civilisationin Southeast Asia, an exhibition of art andartefacts from the region.

This exhibition, a joint initiative of the ArtGallery of South Australia and the NationalGallery of Australia, contains almost 200treasures from six countries, some of whichhad never left their country of origin before.

Sponsoring the exhibition gave Santos theopportunity to demonstrate its commitmentto fostering greater cultural understandingbetween South East Asia and Australia as wellas informing the wider community aboutSantos’ activities in the region.

Cultural heritage

Santos seeks to work cooperatively with the various Indigenous communities in the Northern Territory, Queensland, SouthAustralia and Victoria with whom the Companyshares responsibility for protecting areas of cultural significance.

In 2005 agreements were in place with theKullilli, Boonthmurra, Wangkumarra and theYandruwandha-Yawarraawarrka communitiesthat provide benefits in areas such aseducation, community development andemployment.

Processes for identifying and protectingcultural heritage are included in theEnvironment, Health and Safety ManagementSystem and there are cultural heritagemanagement plans in place in the relevantoperating areas.

Undurana Camel Farm

Santos has made a significant contribution to the establishment of a camel farm atUndurana, about 400 kilometres west of Alice Springs.

This enterprise was established in partnershipwith the people from a local outstation whosaw an opportunity to farm feral camels in theregion and sell them to buyers in Alice Springsand interstate. These camels are thedescendants of camels that were introduced to Australia in the 1840s and now there areestimated to be 750,000 of them roaming the bush.

The Undurana Camel Farm is located nearSantos’ operations at Mereenie and theCompany provided significant assistance tothe project both financially and through theservices of its employees who helped set upthe farm.

Work undertaken included the construction of a paddock fence some 75 kilometres long,which took two years to complete.

The project will benefit a group of TraditionalOwners through employment, income and

A treasure from the Santos-sponsored Crescent Moon Islamic art exhibition: an 18th century gold crown from Java(Banten, Java, Indonesia, Crown, 18th century, gold, precious stones, enamel, metal, 17.0 x 11.5 cm [outer crown]National Museum of Indonesia, Jakarta).



independence as well as removing feral camels that damage the environment. Santosbelieves that this is an exemplary model ofcorporate–community partnership.

PROVIDING SUSTAINABLE PROSPERITYCarbon business plan

Santos recognises the issues relating to acarbon-constrained future and has developeda carbon business plan to identify and managethe associated risks and opportunities, as well as identify and develop areas ofcompetitive advantage.

Santos’ vision is to generate value from its carbon assets and aims to manage thecommercial risk of greenhouse emissions. The plan includes promoting lower carbonfuels, particularly natural gas, and supportingresearch and innovation into future energysources and practices.

Inclusion in indices

Santos has been listed on the Australian SAM Sustainability Index (AusSSI) since the index was established in February 2005. It tracks the performance of around 70 Australian companies considered to beleaders in their sector. Companies are subjectto a rigorous assessment process where

economic, environmental and social criteriaare considered.

The Company is also listed on the ReputexSocial Responsibility Index which comprisesthose companies from the ASX 300 Index that have achieved a Reputex corporate social responsibility rating of ‘A’ (satisfactory) or higher.

2006 SUSTAINABILITY REPORTSantos released its first Sustainability Reviewin 2004, making public its commitment tooperating with a view to its long-termsustainability as an energy company. At thattime Santos adopted sustainability as a corevalue and committed to continually improvingits performance in this area.

Since then Santos has made considerableprogress across a number of areas and plansto release a 2006 Sustainability Report duringthe third quarter. This document will reportprogress against targets and provide furtherdetail on policy, procedures and performanceacross the four domains of sustainability ineach of Santos’ functional areas.

Anslem Impu at the Undurana Camel Farm mustering yards, Northern Territory(photograph courtesy of The Australian newspaper, photograph by Shannon Morris).



CORPORATE GOVERNANCE

1. SANTOS’ APPROACH TO CORPORATEGOVERNANCEThe Board and Management of Santos believethat, for the Company to achieve and maintainits objective of being within the top quartileof exploration and production companiesglobally, it is necessary for the Company tomeet the highest standards of personnelsafety and environmental performance,governance and business conduct across itsoperations in Australia and internationally.Fundamental to this is the Board’scommitment to continually enhance the Company’s culture, vision and values, so as to ensure Santos continues to meet its strategic objectives whilst maintaining the highest standards. With this focus, theBoard and Management similarly recognisethe Company’s responsibilities to itscustomers, employees and suppliers, as well as to the welfare of the communities in which it operates.

To achieve this, the Board works under a set of well-established corporate governancepolicies that reinforce the responsibilities of all Directors and in addition meet therequirements of the Corporations Act 2001and the Listing Rules of the Australian StockExchange (ASX).

The Board regularly reviews and updatesSantos’ corporate governance policies andrelevant practices and procedures for changesto the law, the Listing Rules and corporatepractice on an annual basis and as required.Such reviews occurred during 2005 and theCompany’s policies continue to be updated asa result to ensure that they remain compliantwith the relevant legislation and inaccordance with best practice.

The corporate governance section of theCompany’s website, www.santos.com,contains information relating to theCompany’s corporate governance policies and procedures.

2. BOARD OF DIRECTORS AND ITS COMMITTEESExcept where otherwise indicated, referencesin this Statement to the “Board Guidelines”are to the formal guidelines in force duringthe past financial year and as at 30 March,2006.

The names and details of the experience,qualifications, special responsibilities, andterm of office of each Director of the Companyare set out on page 55 of this Annual Report.Ten Board meetings are generally scheduledper year, two more than required under theBoard guidelines. In 2005, a total of fourteenmeetings were held. Board members areexpected to attend any additional meetings asrequired. Each Director ensures they are ableto devote sufficient time to discharge theirduties and to prepare for Board andCommittee meetings and associated activities.Details of each Director’s attendance at Boardand Committee Meetings and theirshareholdings are also set out on page 63 ofthis Annual Report.

2.1 BOARD RESPONSIBILITIESThe Board is responsible for the overallcorporate governance of the Company,including its strategic direction and financialobjectives, oversight of the Company and itsmanagement, establishing goals forManagement and monitoring the attainmentof these goals.

Specifically, the Board is responsible for:

• the provision of strategic direction and oversight of Management;

• significant acquisitions and disposals of assets;

• significant expenditure decisions outside of the corporate budget;

• hedging of product sales, sales contracts and financing arrangements;

• the approval of, and monitoring of financial performance against strategic plans and corporate budgets;

• the approval of delegations of authority to Management;

• corporate governance generally;

• ethical standards and codes of conduct;

• the selection and evaluation of, and succession planning for, Directors and executive management;

• the remuneration of Directors and executive management; and

• the integrity of and oversight of operational and financial risk management.

The Board delegates management of theCompany’s resources to the Company’sexecutive management team, under theleadership of the Chief Executive Officer and Managing Director (CEO), to deliver the strategic direction and goals approved by the Board. This Statement details theresponsibilities delegated by the Board to executive management for:

• implementing corporate strategies;

• maintaining and reporting on effective risk management (including safety and plant integrity); and

‘UNDERPINNING SANTOS’ CURRENT PERFORMANCE AND

POSITIVE OUTLOOK IS STRONG CORPORATE MANAGEMENT

AND GOVERNANCE.’

WESLEY GLANVILLE MANAGING COUNSEL AND COMPANY SECRETARY



• operating under approved budgets and written delegations of authority.

2.2 BOARD PROCEDURESThe Board Guidelines prescribe that the Board is to meet at least eight times a year,including a strategy meeting of two daysduration. The number of meetings of theBoard and of each of its Committees and thenames of attendees at those meetings are setout on page 63 of this Annual Report. BoardMeetings are structured in two separatesessions, without Management present forone of those sessions, unless specificallyinvited to address a particular issue. Theagenda for meetings is prepared by theCompany Secretary in conjunction with theChairman and CEO, with periodic input fromthe Board. Board papers are distributed toDirectors in advance of scheduled meetings.To assist in the effective execution of itsresponsibilities, the Board Guidelines includeprocedures for providing Directors with allrelevant information and familiarity with theCompany’s major centres of operation.Further, Board meetings take place both atthe Company’s head office and from time totime at key operating sites, to assist the Boardin its understanding of operational issues andthe Company has implemented an ongoingregular education program in relation to theCompany’s business, opportunities and risks.These arrangements ensure each Director isable to inform and familiarise themselves withthe Company’s operations and does not relyexclusively on information provided to themby Management.

Executive management attend Board andCommittee meetings, at which they report to Directors within their respective areas of responsibility. This assists the Board in maintaining its understanding of theCompany’s business and assessing theexecutive management team. Whereappropriate, advisors to the Company attendmeetings of the Board and of its Committees.

2.3 COMPOSITION OF THE BOARDThe composition of the Board is determined inaccordance with the Company’s Constitutionand the Board Guidelines which, among otherthings, require that:

• the Board is to comprise a minimum of five and a maximum of ten Directors (exclusive of the CEO);

• the Board should comprise a substantial majority of independent, non-executive Directors;

• there should be a separation of the roles of Chairman and Chief Executive Officer of the Company; and

• the Chairman of the Board should be an independent, non-executive Director.

Currently, the Board comprises six non-executive Directors, all of whom aredeemed independent under the principles set out below, and one executive Director.

The Board has adopted the definition ofindependence set out in the ASX Best PracticeRecommendations and as defined in the 2002guidelines of the Investment and FinancialServices Association Limited.

Having regard to this definition, the Board generally considers a Director to beindependent if he or she is not a member ofManagement and is free of any interest andany business or other relationship whichcould, or could reasonably be perceived to,materially interfere with, the Director’s abilityto act in the best interests of the Company.The Board will assess the materiality of anygiven relationship that may affectindependence on a case by case basis and has adopted materiality guidelines to assist in that assessment.

Under these guidelines, the followinginterests are regarded as material in theabsence of any mitigating factors:

• a holding of 5% or more of the Company’s voting shares or a direct association with an entity that holds more than 5% of the Company’s voting shares;

• an affiliation with an entity which accounts for 5% or more of the revenue or expense of the Company.

The Board has determined that there shouldnot be any arbitrary length of tenure thatshould be considered to materially interferewith a Director’s ability to act in the bestinterests of the Company, as it believes thisassessment must be made on a case by casebasis with reference to the length of service of all members of the Board.

Each Director’s independence is assessed by the Board on an individual basis, with

reference to the above materiality guidelinesand focussing on an assessment of eachDirector’s capacity to bring independence ofjudgment to Board decisions. In this context,Directors are required to promptly disclosetheir interests in contracts and otherdirectorships and offices held.

2.4 APPOINTMENT OF NEW DIRECTORS,TERM OF OFFICE AND RE-ELECTIONThe Board Guidelines include the followingprinciples:

• non-executive Directors are to be appointed on the basis that their nomination for re-election as a Director is subject to review and support by the Board;

• there should be appropriate circumstances justifying re-election after a specified period of service as a Director; and

• the contribution of the Board and of individual Directors is the subject of formal review and discussion on a biennial and annual basis, respectively.

Prospective candidates for the Board arereviewed by the Nomination Committee andappropriate regard is had to the businessexperience, skills-sets and expertise of thecandidates and that required by the Board to ensure its overall composition enables the Board to meet its responsibilities. TheNomination Committee makes appropriaterecommendations regarding possibleappointments of directors to the Board. Prior to appointment, each Director isprovided with a letter of appointment which encloses a copy of the Company’sConstitution, Board Guidelines, CommitteeCharters, relevant policies and functionaloverviews of the Company’s strategicobjectives and operations. Additionally, the expectations of the Board in respect to a proposed appointee to the Board and the workings of the Board and its Committeesare conveyed in interviews with the Chairman.Induction procedures include access toappropriate executives in relation to details of the business of the Company.

Under the Company’s Constitutionapproximately one third of Directors retire by rotation each year. Directors appointed



during the year are also required to submitthemselves for election by shareholders at the Company’s next Annual General Meeting.

2.5 REVIEW OF BOARD AND EXECUTIVE PERFORMANCEAs noted above, a Board review is conductedon a biennial basis and individual Directorreviews occur annually. The biennial review of the Board and of its Committees wasconducted by an independent consultant in 2005.

Performance evaluation of key executives is undertaken on a quarterly and annual basisby the CEO and summarised in presentation to the Remuneration Committee of the Board, both specifically for determination of remuneration and generally for review by the Board in relation to Managementsuccession planning.

2.6 INDEMNITY, ACCESS TO INFORMATIONAND INDEPENDENT PROFESSIONAL ADVICEInformation in respect to indemnity andinsurance arrangements for Directors andsenior executives appears in the Directors’Statutory Report on pages 65 and 66 of thisAnnual Report.

The Board Guidelines set out thecircumstances and procedures pursuant towhich a Director, in furtherance of his or herduties, may seek independent professionaladvice at the Company’s expense. Thoseprocedures require prior consultation with,and approval by, the Chairman and assurancesas to the qualifications and reasonableness of the fees of the relevant expert and, undernormal circumstances, the provision of theexpert’s advice to the Board.

Pursuant to a deed executed by the Companyand each Director, a Director also has theright to have access to all documents whichhave been presented to meetings of the Boardor to any Committee of the Board or otherwisemade available to the Director whilst in office.This right continues for a term of seven yearsafter ceasing to be a Director or such longerperiod as is necessary to determine relevantlegal proceedings that commenced duringthat term.

2.7 COMPANY SECRETARYThe Company Secretary reports directly to the Board and is responsible for the

administration of the business andresponsibilities of the Board and its variousCommittees (excluding the Audit Committeewhich is the responsibility of the Manager Risk and Audit, who reports to the Chairmanof the Audit Committee).

The Company Secretary acts as the Secretaryto each of the Finance Committee, NominationCommittee, Remuneration Committee andSafety, Health and Environment Committeeand is responsible to those Committees andthe Board for ensuring compliance with theirrespective charters and guidelines.

The Company Secretary advises the Board andits Committees on governance matters andliaises with Management to ensure theresolutions of the Board and its Committeesare discharged. The independent Directors of the Board also have individual access to the Company Secretary, who is empowered toengage the services of independent advisorsat the request of the Board, a Committee orindependent Director.

The Company Secretary can only be appointedand removed by the Board, ensuring that therequirements of the Board and its Committeesare met independently of Management.

The Company’s Managing Counsel, WesleyGlanville (BA, LLB, GDLP, MAICD), aged 44years, was appointed as a joint CompanySecretary on 23 February 2004 and, followingthe retirement of the then Group GeneralCounsel and Company Secretary, has been thesole Company Secretary since 1 July 2004.

3 COMMITTEES OF THE BOARDThe Board has established a number of Board Committees to assist with the effectivedischarge of its duties. All Committees are chaired by, and comprised only of, non-executive, independent Directors, except theSafety, Health and Environment Committee,which includes the CEO as a member.

The Chairman of each Committee provides,and addresses, a written report together withthe minutes and recommendations of theCommittee at the next Board Meeting. TheChairman of each Committee also, on anannual basis, presents an overview report to the Board of the Committee’s activities for the preceding 12-month period.

3.1 AUDIT COMMITTEEThe role of the Audit Committee isdocumented in a Charter, approved by theBoard. This Charter was revised in December2005 in line with contemporary best practice.

(a) Composition of the Audit Committee

The Committee is required to consist of no lessthan three members and to meet at least fourtimes per year. All members must beindependent, non-executive Directors andfinancially literate, with at least one memberhaving past employment experience infinance and accounting, requisite professionalcertification in accounting or othercomparable experience or background. At least one member must have anunderstanding of the Exploration andProduction industry. The Chairman of theBoard is precluded from being the Chairman of the Audit Committee.

The current members of the Audit Committee,all of whom are independent non-executiveDirectors, are: Mr K.A. Dean (Chairman –appointed effective 30 September 2005),Professor J Sloan and Mr R M Harding. Theexternal auditors, CEO, Chief Financial Officer(CFO), Manager Risk and Audit, ManagingCounsel and Company Secretary, and GroupController attend Committee meetings byinvitation.

There were 5 meetings held in 2005.

(b) Role of the Audit Committee

The primary objective of the Audit Committeeis to assist the Board to fulfil its corporategovernance and oversight responsibilitiesrelated to financial accounting practices,external financial reporting, financialreporting risk management and internalcontrol, the internal and external auditfunction, and compliance with laws andregulations relating to these areas ofresponsibility.

Specifically, the role of the Audit Committeeincludes:

• reviewing the effectiveness of the Company’s risk management and internal compliance and control systems relating to financial reporting;

• evaluating the truth and fairness of Company financial reports and recommending acceptance to the Board;



• reviewing the process adopted by the CEO and CFO when certifying to the Board as to the truth and fairness of the Company’sfinancial reports and that the financial reports are based on a sound system of risk management and internal complianceand control;

• examining the accounting policies of the Company to determine whether they are appropriate and in accordance with generally accepted practices;

• meeting regularly with the internal and external auditors to reinforce their respective independence and to determine the appropriateness of internaland external audit procedures;

• reviewing the performance of the internaland external auditors and providing them with confidential access to the Board;

• receiving from the external auditors a formal written statement delineating all relationships between the auditors and the Company and confirming compliance with all professional and regulatory requirements relating to auditor independence;

• referring matters of concern to the Board,as appropriate, and considering issues which may impact on the financial reports of the Company; and

• recommending proposed dividends to the Board for final adoption.

(c) Independence of auditors and non-audit services

The Board has adopted a policy in relation to the provision of non-audit services by theCompany’s external auditor that is based onthe principle that work that may detract fromthe external auditor’s independence andimpartiality, or be perceived as doing so,should not be carried out by the externalauditor. The Audit Committee Charter clearlyidentifies those services that the externalauditor may not provide, those that may besupplied and those that require specificapproval of the Chairman of the AuditCommittee, in consultation with othermembers of the Committee.

It also provides that:

• the Board will not invite any past or present lead audit partner of the firm currently engaged as the Company’s external auditor to fill a vacancy on the Board;

• audit partners who have had significant roles in the statutory audit will be required to rotate off the audit after a maximum of five years and there will be a period of at least two successive years before that partner can again be involved in the Company’s audit; and

• the internal audit function, if outsourced, will be provided by a firm other than the external audit firm.

The Audit Committee provides the Board with a statement clarifying that the provisionof non-audit services by the external auditorsis compatible with the general standard of independence for auditors.

The nature and amount of non-audit servicesprovide by the external auditors and aredetailed on page 66 of the Directors’Statutory Report, together with the Directors’reasons for being satisfied that the provisionof those services did not compromise theauditor independence requirements of theCorporations Act. A copy of the auditor’sindependence declaration as required undersection 307C of the Corporations Act is set outon page 135 of this Annual Report.

3.2 NOMINATION COMMITTEEThe role, responsibilities and membershiprequirements of the Nomination Committeeare documented in the Board Guidelines andin a separate Charter, approved by the Board.

Under the Board Guidelines, it is theresponsibility of the Nomination Committee todevise the criteria for, and review membershipof, and nominations to, the Board. Theprimary criteria adopted in selection ofsuitable Board candidates is their capacity tocontribute to the ongoing development of theCompany having regard to the location andnature of the Company’s significant businessinterests and to the candidates’ qualificationsand experience by reference to the attributesof existing Board members.

When a Board vacancy exists or where it isconsidered that the Board would benefit from

the services of a new Director with particularskills, the Nomination Committee hasresponsibility for proposing candidates for consideration by the Board and, whereappropriate, engages the services of external consultants.

The Chairman of the Board is the Chairman of the Nomination Committee. The currentmembers of the Nomination Committee, all of whom are independent non-executiveDirectors, are Mr S Gerlach (Chairman), Mr M A O’Leary and Professor J Sloan.

3.3 REMUNERATION COMMITTEEThe role of the Remuneration Committee is documented in a Charter, approved by the Board, which Charter prescribes that the Committee must consist of at least threenon-executive Directors.

The Remuneration Committee is responsiblefor reviewing the remuneration policies andpractices of the Company including: thecompensation arrangements for the CEO and senior management; the Company’ssuperannuation arrangements; employeeshare and option plans; executive and seniormanagement performance review, successionplanning, and, within the aggregate amountapproved by shareholders, the fees for non-executive Directors. The Committee has access to independent advice andcomparative studies on the appropriateness of remuneration arrangements.

The current members of the RemunerationCommittee, all of whom are independent non-executive Directors, are: Professor JSloan (Chairperson), Mr S Gerlach and Mr R M Harding.

3.4 FINANCE COMMITTEEThe role of the Finance Committee isdocumented in a Charter, approved by the Board, and includes responsibility forconsidering and making recommendations to the Board on the Company’s capitalmanagement strategy and the Company’sfunding requirements and specific fundingproposals. The Committee also hasresponsibility for formulating and monitoringcompliance with treasury policies andpractices and the management of credit,liquidity and commodity market risks.



The current members of the FinanceCommittee, all of whom are independent non-executive Directors, are: Mr S Gerlach(Chairman), Mr K A Dean and Mr M A O‘Leary.

3.5 SAFETY, HEALTH AND ENVIRONMENT COMMITTEEThe role of the Safety, Health andEnvironment Committee is documented in a Charter, approved by the Board, andincludes oversight of the Environment, Health and Safety Management System andreview of the regular internal and externalenvironmental and safety audits.

The current members of the Safety, Health and Environment Committee are: Mr S Gerlach(Chairman), Mr M A O’Leary, Mr R M Hardingand Mr J C Ellice-Flint.

4 DIRECTOR FEES AND EXECUTIVE REMUNERATIONRemuneration levels are competitively set toattract and retain appropriately qualified andexperienced personnel. Performance, dutiesand responsibilities, market comparison andindependent advice are all considered as partof the remuneration process.

The structure and details of the remunerationpaid to directors, the CEO and other seniorexecutives during the period are set out in the Remuneration Report commencing on page40 of this report and note 28 to the financialstatements on page 112 of this report.

5 RISK MANAGEMENTThe Board is responsible for overseeing the implementation of, and ensuring there are adequate policies in relation to, the Company’s risk management andinternal compliance and control systems.These systems require Management to beresponsible for identifying and managing risks to the Company’s businesses.

An Enterprise Wide Risk Managementapproach forms the cornerstone of RiskManagement activities of Santos and is basedon the relevant Australian Standard (AS/NZS4360 : 2004). This approach is incorporated in the Company’s Risk Management Policy, and aims to ensure that major business risksfacing the Company have been consistentlyidentified, analysed and evaluated, and thatactive management plans and controls are inplace for the ongoing management of these

risks. Independent validation of controls isundertaken by internal audit as part of its riskbased approach. The internal audit function is independent of the external auditor andreports to the Audit Committee.

The CEO and CFO are required to advise the Board annually in writing whether:

• the Consolidated Financial Report is founded on a sound system of risk management and internal compliance and control systems, which implements the policies adopted by the Board; and

• the Company’s risk management and internal control systems, to the extent they relate to financial reporting, are operating efficiently and effectively in all material respects.

The Board has in place a number ofarrangements and internal controls intendedto identify and manage areas of significantbusiness risk. These include the maintenanceof:

• Board Committees;

• detailed and regular budgetary, financial and management reporting;

• established organisational structures, procedures, manuals and policies;

• audits (including internal and external financial, environmental and safety audits);

• comprehensive insurance programmes; and

• the retention of specialised staff and external advisors.

Examples of management of specific risks are as follows:

• Management of environmental and safety risk – environmental and safety risk is managed through: a comprehensiveEnvironmental Health and Safety Management System based on Australian Standard 4801 and International Standard 14001; safety, health and environment committees at Board and Management levels; the retention of specialist environmental, health and safety staff and advisors; regular internal and external environmental, health and safety audits; and imposing

environmental care and health and safety accountability as line management responsibilities.

• Management of exploration risk – exploration risk is managed through internal control systems which include: formalised risk assessment procedures at the functional level; corporate reviewin both prospect and hindsight; Board approval of exploration budgets; and regular reporting on progress to the Board. External reviews are also undertaken as necessary.

• Investment appraisal – the Companyhas clearly defined procedures for capital expenditure. These include: annual budgets; detailed appraisal and review procedures; levels of authority; and due diligence requirements where assets are being acquired.

• Financial reporting and treasury – a comprehensive budgeting system exists with an annual budget approved by the Board. Monthly actual results are reportedagainst budget and, where applicable, revised forecasts for the year are preparedand reported to the Board. Speculative transactions are prohibited. Further details relating to financial instruments and commodity price risk management are included in Note 34 to the financial statements.

• Functional reporting – all significant areas of Company operations are subject to regular reporting to the Board. The Board receives regular reports on the performance of each functional area, including: operations; gas marketing and commercialisation; liquids marketing;corporate and people; legal and secretariat; geoscience, exploration and new ventures; development and technical services; finance; safety; government; investor relations and environmental matters.

6 ETHICAL STANDARDS AND CODE OF CONDUCTTo promote high standards of corporategovernance and business conduct theCompany has provided its employees with a clear set of rules, values and guidelines



to follow when carrying out their work as a Santos employee and representative. In addition to the Board Guidelines, theCompany has in place an integrated code of conduct which prescribes that, in additionto compliance with all applicable legalrequirements, the Board expects all Directors,executives and employees of the Company toadopt appropriate standards of professionaland business conduct in their dealings onbehalf of the Company. The Board, inconjunction with executive management, is responsible for ensuring compliance by all employees with those standards.

In particular, the integrated code of conductrequires that Directors and employees:

• avoid conflicts of interest, and ensure that all business transactions are conducted solely in the best interests of the Company;

• are aware of, and comply with laws and regulations relevant to the Company’s operations including environmental and trade laws both in Australia and abroad;

• protect any Company assets under their control and not use Company assets for personal purposes, without prior Company approval;

• do not disclose or use in any improper manner confidential information about the Company, its customers or affairs;

• respect the privacy of others and comply with the Company’s Privacy Policy; and

• report misconduct through prescribed reporting channels, including as a last resort, the independent Company ‘hotline’.

The standards of conduct expected of Santosstaff, including those directed at the broaderstakeholder constituency of shareholders,employees, customers and the community, are also recorded in separate guidelines and policies relating to dealing in securities (refer to the next section), the environment,occupational health and safety and humanresources. Further, a code of conduct, basedon that developed by the Group of 100 (anassociation of senior finance executives fromAustralia’s business enterprises) applies tothe CFO and all other officers and employees

within the finance function of the Companywho have the opportunity to influence theintegrity, direction and operation of theCompany and its financial performance.

Where applicable, the guidelines and policiesare incorporated by reference in individualcontracts of employment or expressly set outin those contracts, including provisionsrelating to: conflicts of interest;confidentiality and restrictions against useand dissemination of information; use ofCompany assets; perquisites, tenderprocesses, benefits and contact withsuppliers; employment opportunity practices;privacy; training and further educationsupport; and smoking, alcohol and drugs.

7 GUIDELINES FOR DEALING IN SECURITIESThe Company has developed specific writtenguidelines that prohibit Directors andexecutives (and their respective associates)from acquiring, selling or otherwise trading in the Company’s shares if they possessmaterial price-sensitive information which is not in the public domain.

Pursuant to these guidelines, no person may deal in securities while they are in thepossession of price sensitive information. In other circumstances, Directors must inform and receive acknowledgment from the Chairman or his representative (andexecutives from the Company Secretary or a person appointed by the Board) of anintention prior to any dealings in securitieseither by themselves or by their associates,and must promptly notify details following the dealing.

The Company’s policy is that trading in Santossecurities is permitted, with approval as setout above, only during the following periods:

• the period commencing two clear days after the announcement of the Company’sannual results and ending 1 July; and

• the period commencing two clear days after the announcement of the Company’shalf-yearly results and ending 1 January.

Under the guidelines, prohibitions on dealingin securities apply not only to the acquisitionand disposal of shares, but also to theacquiring, taking, assigning and releasing of options traded in the options market.

Directors and executives may not deal in securities on considerations of a short-term nature.

8 CONTINUOUS DISCLOSURE ANDSHAREHOLDER COMMUNICATIONThe Company is committed to giving allshareholders timely and equal access toinformation concerning the Company.

The Company has developed policies andprocedures in accordance with its commitmentto fulfilling its obligations to shareholdersand the broader market for continuousdisclosure. These policies establish proceduresto ensure that Directors and Management areaware of and fulfil their obligations in relationto the timely disclosure of material pricesensitive information. Information must notbe selectively disclosed prior to beingannounced to the ASX or NASDAQ. Directorsand executive management must notify theCompany Secretary as soon as they becomeaware of information that should beconsidered for release to the market.

When the Company makes an announcementto the market, that announcement is releasedto each exchange where its shares are listed:ASX and NASDAQ. The Company Secretary isresponsible for communications with theexchanges. All material information disclosedto the ASX is posted on the Company’s websiteat www.santos.com. This includes ASXannouncements, annual reports (includingtherefore this Corporate GovernanceStatement), notices of meeting, CEObriefings, media releases, and materialspresented at investor, media and analystbriefings. An email “alert” facility is alsooffered to shareholders. Web-casting ofmaterial presentations, including annual and half-yearly results presentations, isprovided for the benefit of shareholders,regardless of their location.

The Board is aware of its obligations and willseek shareholder approval as required by theCompany’s constitution, the Corporations Act and the ASX Listing Rules.

Additionally, the Company’s external auditorattends annual general meetings to beavailable to answer shareholder questionsrelevant to the conduct of the audit.


REMUNERATION REPORT

The Directors of the Company present theRemuneration Report prepared in accordancewith section 300A of the Corporations Act forthe Company and the consolidated entity forthe year ended 31 December 2005. ThisRemuneration Report forms part of theDirectors’ Report.

The Company’s overall objective is to delivertop quartile strategic operating andshareholder value performance in the shortand longer terms when compared with itspeers in the international petroleumexploration and production industry. In orderto achieve these objectives the Companyneeds to have the best, brightest and mostexperienced people available to it. Delivery ofthe Company’s remuneration strategy is a keyobjective in delivering that performance.

The Company’s remuneration strategy istherefore designed to attract, retain andmotivate appropriately qualified andexperienced directors, executives and staffcapable of discharging their respectiveresponsibilities to enable the Company toachieve its business strategy.

NON-EXECUTIVE DIRECTORSThe fees paid to non-executive Directors areset at a level which:

• is consistent with prevailing marketconditions;

• ensures the Company is able to attractand retain Directors of the requiredqualifications, background andexperience needed to ensure an effectiveand value adding Board; and

• reflects the responsibilities of, and thetime commitment required from, eachnon-executive Director to discharge his orher duties.

CEO AND SENIOR EXECUTIVESExecutive remuneration comprises both afixed component and an at-risk componentand is intended to remunerate executives forincreasing shareholder value, for achievingfinancial targets and business strategies andto align their remuneration with the financialinterests of shareholders. The Company’sexecutive remuneration strategy is designedto attract and retain high calibre executives.

Details of the Company’s remunerationstrategy are set out in this Report as follows:

TABLE 1: OVERVIEW OF ELEMENTS OF REMUNERATIONDiscussion in

Elements of Specified Remunerationremuneration Directors executives Report

Non-executive Executive

Fixed remuneration Fees ✔ ✘ ✘ Sections 1A, 1B

Salary ✘ ✔ ✔ Sections 2A, 2C, 2D, 2F

Superannuation ✔1 ✔ ✔ Sections 1A, 2C, 2D, 2F

Expense allowance ✘ ✘ ✘ –

Other benefits ✘ ✔ ✔ Sections 1B, 2D, 2F

At-risk remuneration Short term incentive ✘ ✔ ✔ Sections 2A, 2B, 2C, 2D, 2F

Long term incentive ✘ ✔ ✔ Sections 2A, 2B, 2C, 2D, 2F

Post-employment Notice periods & ✘ ✔ ✔ Section 2Etermination payments

1 Superannuation contributions are made on behalf of non-executive Directors to satisfy obligations under the Superannuation Guarantee Charge legislation.

This Remuneration Report has been adopted in accordance with a resolution of the Directors of Santos Limited.




1 NON-EXECUTIVE DIRECTORS’ FEESA. Board Policy on feesShareholder approved aggregateNon-executive Directors’ fees, includingcommittee fees, are set by the Board within the maximum aggregate amount of $1,500,000 per annum approved byshareholders at the Annual General Meetingheld on 7 May 2004.

The fees paid to non-executive Directorswithin this aggregate amount are set at levels which reflect both the responsibilitiesof, and the time commitments required from,each director to discharge their duties. Non-executive Directors remuneration is not linked

to the performance of the Company in order to maintain their independence andimpartiality. The fees paid to non-executiveDirectors in 2005 are set out below.

Remuneration Committee considerationsIn setting fee levels, the RemunerationCommittee, which makes recommendations to the Board, takes into account:

• independent professional advice;

• fees paid to non-executive Directors by comparable companies;

• the general time commitment requiredfrom non-executive Directors and therisks associated with discharging theduties attaching to the role of director;

• the level of personal responsibilityundertaken by a Director; and

• the general commercial expertise,experiences and qualifications of theDirectors.

The Remuneration Committee and the Boardwill continue to review the approach to non-executive Director fees to ensure it remainscompetitive and in line with general industrypractice and best practice principles ofcorporate governance.

Details of the membership of the RemunerationCommittee and its responsibilities are set outin the Corporate Governance Statement onpage 37 of the Annual Report.

Superannuation and fees for specialservicesSuperannuation contributions are made onbehalf of the non-executive Directors inaccordance with the Company’s statutorysuperannuation obligations.

In accordance with the constitution, non-executive Directors are also permitted to bepaid additional fees for special duties orexertions. Such fees may or may not beincluded in the aggregate remuneration capapproved by shareholders, as determined bythe Directors. No such fees were paid duringthe year.

Directors are also entitled to be reimbursedfor all business related expenses, includingtravel on company business, as may beincurred in the discharge of their duties.

Retirement benefitsDirectors appointed after 1 January 2004 arenot entitled to receive a benefit on retirement(other than statutory entitlements).

Non-executive Directors appointed prior to 1 January 2004 are contractually entitled toreceive a retirement benefit but the amountof the benefit was “frozen” as at 30 June2004. The benefit is payable upon ceasing to hold office as a director. The retirementpayment (inclusive of superannuationguarantee charge entitlements) is madepursuant to an agreement entered into witheach non-executive Director on termsapproved by shareholders at the 1989 AnnualGeneral Meeting. These benefits have beenfully provided for by the Company.

TABLE 2: DIRECTORS’ FEES

Board Board Committee

Chairman Member Chairman Member

Fee 330,0001 110,000 9,000-18,0002 6,000-12,0003

1 The Chairman did not receive any additional fees for serving on Board Committees.

2 Finance Committee ($9,000); Remuneration Committee ($12,000); Safety, Health and Environment Committee ($15,000); Audit Committee ($18,000).

3 Finance Committee ($6,000); Remuneration Committee ($8,000); Safety, Health and Environment Committee ($10,000); Audit Committee ($12,000).



B. Remuneration Details of non-executive Directors’ remuneration for the years ended 31 December 2005 and 31 December 2004 are set out in the following tables.All values are in A$ unless otherwise stated.

TABLE 3(a): DETAILS OF NON-EXECUTIVE FEES AND ENTITLEMENTS FOR 2005Directors’ Committee Superannuation

fees fees contributions1 Other Total

S Gerlach (Chairman) 330,000 - 11,862 - 341,862

P C Barnett 110,000 24,000 11,862 - 145,862

K A Dean2 93,650 8,153 10,166 - 111,969

R M Harding 110,000 12,000 10,980 - 132,980

G W McGregor3 82,500 18,000 8,807 - 109,307

M A O’Leary 110,000 10,000 10,800 - 130,800

C J Recny2 93,650 - 8,428 - 102,078

J Sloan 110,000 24,000 11,822 - 145,822

Total 1,039,800 96,153 84,727 - 1,220,680

TABLE 3(b): DETAILS OF NON-EXECUTIVE FEES AND ENTITLEMENTS FOR 2004Post-employment

Directors’ Committee Superannuation fees fees contribution1 Retirement4 Other6 Total

S Gerlach (Chairman) 285,000 - 11,293 - 31,167 327,460

P C Barnett 95,000 15,500 9,945 15,569 - 136,014

F J Conroy5 90,041 14,689 9,425 15,927 - 130,082

R M Harding 91,667 1,000 5,040 - - 97,707

G W McGregor 95,000 20,500 10,157 15,716 - 141,373

M A O’Leary 95,000 9,000 9,360 16,842 - 130,202

J Sloan 95,000 19,750 10,090 15,403 - 140,243

Total 846,708 80,439 65,310 79,457 31,167 1,103,0811 Superannuation contributions made on behalf of non-executive Directors to satisfy the Company’s obligations under applicable Superannuation Guarantee Charge legislation.

2 Mr K A Dean and Mr C J Recny joined the Board on 23 February 2005.

3 Mr G W McGregor retired from the Board on 30 September 2005.

4 These amounts represent the balance of the provision for retirement benefits that were “frozen” as at 30 June 2004 for non-executive Directors appointed prior to 1 January 2004. The retirementbenefits for all such Directors were fully provided for at the end of the period.

5 Upon his retirement as a Director on 14 December 2004, Mr F J Conroy became entitled to a retirement payment of $161,447 in accordance with arrangements previously approved by shareholders.Only $15,927 of this amount has been disclosed as part of Mr Conroy’s remuneration for the 2004 reporting period, as the balance of the payment had been provided for in previous reporting periods.

6 Payment related to a leasing arrangement for a motor vehicle, which arrangement was terminated on 30 June 2004.



2 CEO AND SENIOR EXECUTIVEREMUNERATION

A. Board policy on remunerationThe Remuneration Committee of the Boardhas recommended, and the Board hasadopted, a policy that remuneration will:

(a) reflect the responsibilities of executivesand other employees;

(b) be reasonable and competitive in theresources and energy industry withinwhich the Company operates in order toattract, motivate and retain highperforming employees;

(c) ensure a significant portion ofremuneration is at risk against individualand company performance andshareholder value creation;

(d) ensure that superior performance isrewarded, thereby reinforcing the short,medium and long term objectives of theCompany as set out in the strategicbusiness plans endorsed by the Board;and

(e) encourage executives to manage from the perspective of shareholders.

In order to link a substantial proportion of the Chief Executive Officer and ManagingDirector (CEO) (Mr John Ellice-Flint) andsenior executive remuneration to Companyperformance, the remuneration packagesinclude a fixed component and both shortterm and long term incentive components.Accordingly, the Board aims to achieve abalance between fixed and at-risk orperformance related components ofremuneration at each job and seniority level.

The relative proportion of the CEO’s andsenior executive’s total remunerationpackages that is performance-based is set out in the table below:

TABLE 4: OVERVIEW OF REMUNERATION PACKAGE

Fixed Performance-based % of total remuneration (annualised) remuneration remuneration

TFR STI LTI

CEO1 44% 56% 0%2

Executive VP Operations 52% 27% 21%

Chief Financial Officer 52% 27% 21%

Other specified executives 57% 20% 23%

Other senior executives 66% 14% 20%

1 On appointment the CEO was granted 1,000,000 Restricted Shares subject to completion of a service condition.

2 The CEO’s total remuneration package for 2005 also incorporated a long term incentive element in the form of 1,000,000 options. This was the third tranche of a grant of options made at the timeof his appointment in December 2000. These options were subject to a TSR performance hurdle and had an exercise price of $5.83. The options vested during the year and were exercised inSeptember 2005. In accordance with the AIFRS Accounting Standards, as these options were granted prior to 7 November 2002, no accounting value has been attributed to these options in thefinancial statements or for the purposes of remuneration disclosure in 2005.



B. Company performance andRemuneration

Pay and performance relationshipSantos’ executive remuneration is directlylinked to the performance of the companyacross a range of measures including thecreation of shareholder wealth. Santos’executive remuneration policy emphasisespay for performance, with a remuneration mix that is on average more performanceleveraged than many competitors. That is, a higher proportion of Santos’ executive payis at risk when compared to that of executivesin many competitor companies.

The at-risk element of pay is comprised of two components.

• Short term incentives provide for a bonuspayment if performance based on a mix of company and individual criteria meetor exceed targets set at the beginning of each financial year. Companyperformance influences 70% of specifiedexecutives’ short term incentives, andindividual performance influences theremaining 30%.

• Long term incentives provide for the vesting of equity based rewards ifperformance over a three-year perioddelivers above average shareholderreturns relative to other companies. Longterm performance is assessed usingrelative Total Shareholder Return (TSR).TSR incorporates share price growth,dividends and other capital adjustmentsand is widely considered as one of thebest indicators of shareholder wealth.

Vesting of 50% of the 2005 LTI award is based on relative TSR against ASX 100companies, and vesting of the other 50% is based on relative TSR against a group of Australian exploration and productioncompanies in the ASX Energy Index with amarket capitalisation above $400 million andinternational exploration and productioncompanies, which for 2005 comprised:

• Anadarko Petroleum Corporation

• Apache Corporation

• Australian Worldwide Exploration Limited

• BG Group PLC

• Burlington Resources Inc

• Canadian Natural Resources Limited

• Chesapeake Energy Corporation

• Devon Energy Corporation

• EOG Resources Inc

• Hardman Resources Limited

• Murphy Oil Corporation

• Newfield Exploration Co

• Nexan Inc

• Noble Energy Inc

• Oil Search Limited

• Talisman Energy Inc

• Unocal Corporation

• Woodside Petroleum Limited

• XTO Energy Inc.

Annual company performanceThe table below shows results against various measures of company performance from 2001 to 2005. These measures are examples of measuresused to determine the overall level of bonuses paid.

TABLE 5: COMPANY PERFORMANCE MEASURES 2001–2005Year 2001 2002 2003 2004 2005

Safety (total recordable case frequency rate) 8.8 9.0 7.2 6.4 4.9

Environment (cubic metres of uncontained spills) 399 393 1,943 83 18.5

Production (mmboe) 55.7 57.3 54.2 47.1 56.0

Netback (A$/boe) 19.30 18.74 19.03 21.27 31.99

Reserve replacement cost – 1P (A$/boe) Not measured 8.73 8.57 16.79 12.91

Reserve replacement rate – 1P (%) Not measured 119 148 121 218

ROACE (%) 13.9 8.9 8.8 11.7 19.8

EBITDAX (A$/share) 1.81 1.86 1.81 1.97 3.13



Long Term Company PerformanceAs an indication of the Company’s long term performance, the graph to the rightillustrates the Company’s TSR from 2001 to2005, together with the average TSR of theASX 100 and average TSR of the group ofAustralian and international companies listedon page 44.

The second graph shows the Company’s shareprice between January 2001 and December2005.

Dividends paid by the Company from 2001 to2005 are as follows:

(Dividends per ordinary share)

2001 $0.302002 $0.302003 $0.302004 $0.302005 $0.36

Capital ManagementAs part of the Company’s ongoing capitalmanagement strategy, $250 million ofordinary shares were bought back on 4 December 2001. This buy-back was funded through a $350 million offer of Reset Convertible Preference Shares, which provided a more flexible and efficient form of funding.

The Company bought back 40,518,558 fullypaid ordinary shares, representing 6.54% of fully paid ordinary shares on issue at thatdate, at a price of $6.17 per share comprisingan amount of $106,563,807 debited againstthe Company’s capital account and an amount of $143,435,695 debited against the retained earnings account.

As a further capital management initiative,the Company decided to replace the ResetConvertible Preference Shares with analternative form of capital. The Companyundertook a $600 million offering ofRedeemable Convertible Preference Shares (orFUELS) and, out of the proceeds, on 30September 2004 redeemed and bought backthe entire 3,500,000 Reset Convertible

Preference Shares on issue at that date.2,865,821 were redeemed at face value andreinvested in FUELS, 489,774 shares werebought back for $105 each and cancelled, and144,405 were redeemed at face value. Thisredemption and buy-back resulted in anamount of $350,000,000 being debitedagainst the Company’s capital account and anamount of $2,448,870 being debited againstretained profits representing the $5.00premium paid over the issue price in the buy-back of the 489,774 Reset ConvertiblePreference Shares.

C. ELEMENTS OF REMUNERATION – CEO

2005The structure of the CEO’s 2005 remunerationpackage was agreed at the time of enteringinto his executive Service Agreement inDecember 2000 in order to recruit him and to,in part, compensate him for some of thebenefits he gave up in leaving his previous

employment. His remuneration during 2005comprised the following components:

1. Fixed remuneration (subject to review);

2. At-risk remuneration, comprising:

• an annual bonus (as determined by the Board);

• an entitlement to 1,000,000 five-yearRestricted Shares which vested on12 December 2005; and

• 1,000,000 options which achieved the required performance hurdles and vested during the year.

Mr Ellice-Flint’s fixed remuneration for the year ended 31 December 2005 was$1,300,000. In accordance with the terms of this Service Agreement Mr Ellice-Flint was able to take this “base salary package” in a combination of salary and benefitsagreed with the Chairman.

Santos Limited

December 2005 January 2001

TSR OF SANTOS, ASX 100 AND AUSTRALIAN AND INTERNATIONAL COMPANIES FROM 2001 TO 2005%

E&P Comparator Group ASX 100

-50

0

50

100

150

200

December 2005 January 2001

SANTOS SHARE PRICE 2001–2005$

0

5

10

15



Mr Ellice-Flint’s annual bonus ranges from 0% to a potential 150% of his fixedremuneration, depending upon performancemeasured in terms of growth of profitability,exploitable reserves, share price increase and other objectives set by the Board. Hisperformance against these targets wasdetermined subsequent to the balance date.The value of the cash bonus granted to MrEllice-Flint during 2005 was $1,657,500 or85% of his maximum potential annual bonus.The remainder of Mr Ellice-Flint’s maximumpotential annual bonus did not vest.

On 13 December 2000, Mr Ellice-Flint wasgranted 1,000,000 Restricted Shares. Theseshares were granted to him at no cost at thetime of his appointment as CEO as part of thetotal package required to attract Mr Ellice-Flint from the senior position he had heldpreviously. No performance conditions wereattached to the shares and legal title passedto Mr Ellice-Flint upon his completion of fiveyears service with Santos on 12 December2005.

In addition, the Company has beencontributing an actuarially determinedamount into the Company’s superannuationfund to provide for Mr Ellice-Flint’ssuperannuation benefits.

Mr Ellice-Flint was also granted options, eachto acquire a fully paid ordinary share in theCompany. The exercise price of the optionswas set at the time of his appointment in2000 at $5.83, and vesting of the third andfinal tranche of 1,000,000 options waseffected upon the satisfaction of performanceconditions, which were tested during 2005.These options were provided essentially onthe same terms as those issued to othersenior executives under the Santos ExecutiveShare Option Plan at the time of grant. Thevalue of these options, together with theterms on which they were granted, areoutlined further below.

2006The structure of Mr Ellice-Flint’s remunerationarrangements has been reviewed followingthe completion of his first five years in office.The revised arrangements are intended tocover the period from January 2006 until atleast August 2009. Details of the proposedarrangements were previously disclosed tothe ASX.

Mr Ellice-Flint’s fixed annual remunerationwill increase to $1,500,000 to be reviewedannually thereafter. Mr Ellice-Flint’s shortterm incentive enables a maximum of 150% of fixed annual remuneration to be earned for exceeding quantitative and qualitativetargets. In addition, 50% of the actual annualbonus awarded in each year is required to beinvested in shares in the Company, which areto be held, in general, for a further period of two years. Subject to receiving shareholderapproval at the 2006 AGM, Mr Ellice-Flint willbe granted 2,500,000 options under the SantosExecutive Share Option Plan. The options willbe subject to the following performancetesting dates and vesting periods:

• 500,000 options which will vest no earlierthan 26 August 2007 (noting theseoptions were intended to be approved atthe 2005 AGM but were held over as aresult of the overall remuneration reviewundertaken by the Board);

• 1,000,000 options which will vest noearlier than 26 August 2008; and

• 1,000,000 options which will vest noearlier than 26 August 2009.

The exercise price of the options is $11.36,which is the weighted average of the shareprice over the 10-day period up to andincluding 9 March 2006.

The performance conditions may be retestedduring the 12-month period commencing onthe earliest testing date for a tranche, as setout above. If the performance conditions are not satisfied at the end of that 12-monthretesting period, the options in that tranchewill lapse.

The superannuation arrangements put intoplace when Mr Ellice-Flint was appointed have been varied. Those arrangements areexpensive and tax inefficient for both theCompany and Mr Ellice-Flint and will beincreasingly so over time. The Companyrequired superannuation contribution in 2005was $637,000 and that cost will escalate sinceMr Ellice-Flint has attained the age of 55years. Mr Ellice-Flint’s current entitlement toa benefit equal to 2.76 times his base salaryon retirement will be frozen. In place of thefuture benefits he will forego, the Companywill seek shareholder approval to provide MrEllice-Flint with an annual loan of $500,000to acquire Santos shares in each of 2006,2007 and 2008 which are to be held duringthe course of his continued employment orsuch other period as the Board determines.

Each loan of $500,000 is to be interest freeand forgiven after three years or such otherperiod as the Directors determine and is to be conditional upon Mr Ellice-Flint’scontinued service and the discharge of hisresponsibilities as required under his ServiceAgreement, entered into with the Company on 13 December 2000.

Fringe benefits tax will not be payable on theinterest free loan, but will be payable at thetime of its forgiveness. The total cost to theCompany for each loan will be approximately$1 million.

D. ELEMENTS OF REMUNERATION – OTHER SPECIFIED EXECUTIVES

As indicated in Section 2B, remuneration for the Company’s other senior executives is made up of the following components:

1. Total Fixed Remuneration (comprisingsalary, superannuation and benefits);and

2. At-risk remuneration, comprising:

• Short Term Incentives (STI) – based on annual individual and Companyperformance; and



Summary of the STIWhat is the STI? The STI is an annual cash bonus paid to reward performance based on a mix of both Company

and individual performance targets.

Who participates in the STI? The CEO, senior executives and all non-award employees.

Why does the Board consider the STI an The STI is designed to put a proportion of each executive’s annual remuneration at risk againstappropriate incentive? meeting targets linked to the Company’s annual business objectives, thereby driving both

individual and Company performance.

What are the maximum amounts that can The maximum amounts that can be earned as a STI are 150% of fixed remuneration for thebe earned as a STI? CEO, and 50% or 75% of TFR for specified executives.

What proportions of an executive’s STI For the specified executives, 70% of the STI is based on Company performance, and the is based on Company performance and remaining 30% is based on individual performance. For other executives, 50% of the STI is individual performance? based on Company performance, and the other 50% is based on individual performance.

What are the performance conditions? Company performance is assessed on a range of metrics covering reserves growth, reservereplacement cost, production, margin, new growth options, shareholder value creation, people,environment, health, safety and continuous improvement. Individual performance is assessedagainst targets set within each executive’s area of responsibility.

Who assesses performance? The Remuneration Committee assesses performance against the conditions in respect of the CEO and makes a recommendation to the Board. The CEO assesses performance against theconditions in respect of senior executives following the close of the financial year and havingregard to the relevant financial year’s results and makes a recommendation to the RemunerationCommittee, which approves the award of short term incentives to the senior executives.

How is Company performance assessed? Each metric is assessed against target and assigned a score on a 5 point scale. The average ofthe scores of each metric is used to quantify a bonus pool expressed as a percentage of the sumof maximum bonuses of all eligible employees. The bonus pool may be adjusted after taking intoconsideration other factors not reflected in the metrics but deemed relevant to Companyperformance.

Were the performance conditions met The metrics indicated the Company had outperformed against target, resulting in a bonus poolduring 2005? equivalent to 85% of the sum of maximum bonuses of eligible employees.

What percentage of maximum STI was paid In respect of each of the specified executives (other than Mr Moore who had no entitlement during the year for the specified executives upon ceasing employment), the STI performance conditions were satisfied to 75-100% of the of the Company and the Group? maximum potential annual bonus. The actual amounts paid to those executives are set out in

Table 10. The remainder of the maximum potential annual bonus did not vest.

• Long Term Incentives (LTI) – based on the Company’s performance relativeto other companies over a three-yearperiod.

Total Fixed Remuneration (TFR)The terms of employment for all executivemanagement contain a fixed remunerationcomponent. The TFR component is expressedas a dollar amount that the executive maytake in a form agreed with the Company. Thisamount of remuneration is not dependentupon performance, but is quantified byreference to the median remuneration paid

to executives in comparable roles in theAustralian market, as well as the individual’squalifications and experience.

Short Term Incentive (STI) The STI program links specific performancetargets with the opportunity for eligibleexecutives to earn cash incentives based on a percentage of fixed remuneration.



Long Term Incentive (LTI)The Company’s LTI arrangements are designed to link executive reward with the key performance drivers which underpin sustainable growth inshareholder value – which comprises both share price and returns to shareholders.

Summary of the LTIWho is entitled to participate? Senior executives who are able to influence the generation of shareholder wealth and thus have

a direct impact on the Company’s performance against the relevant performance hurdles.

What form does the LTI take? Share Acquisition Rights (SARs) or options, at the executive’s election, pursuant to the SantosEmployee Share Purchase Plan (SESPP) and the Santos Executive Share Option Plan (SESOP)respectively.

What is a SAR? A conditional entitlement to a fully paid ordinary share, subject to the satisfaction ofperformance conditions, on terms and conditions determined by the Board.

What is an option? An entitlement to acquire a fully paid ordinary share in the company at a predetermined price,subject to the satisfaction of performance conditions, on terms and conditions determined bythe Board.

How is the amount of the grant determined? The amount of the grant is quantified by reference to the median size of grant given toexecutives in comparable roles in the Australian market. Each of the three grants made in 2005 were 40% of TFR for specified executives, and 20% to 30% of TFR for other executives(three separate grants were made at the same time in 2005, two of which represented grantsthat would ordinarily have taken place in 2003 and 2004). These make-up grants were madefollowing the review of the senior management long term incentive program. This is consistentwith the Board’s intention that LTI awards should be made in general on an annual basis and bejudged against a three-year performance measurement period. The relative proportions of LTI as a part of Total Remuneration are given in Table 4 on page 43 for each level of executive.

What is the performance condition? Relative TSR, which incorporates share price growth, dividends and other capital adjustments.

What is the performance period? A rolling period of 3 financial years.

How is TSR tested? At the end of the performance period, over the performance period, against two comparator groups.

What are the comparator groups for the 50% of each grant - the ASX 100 at the beginning of the relevant performance period.performance condition? 50% of each grant - all Exploration and Production companies in the ASX Energy Index with

market capitalisation above $400 million, plus international Exploration and Productioncompanies.

What is the vesting schedule? Refer to Table 7 on page 49.

Why is TSR appropriate? The Board believes this is a fair measure of returns to shareholders, such that a proportion ofeach executive’s remuneration is linked to growth in shareholder value and therefore executivesreceive a benefit where there is a corresponding direct benefit to shareholders.

Why does the Board think that the vesting The Board believes that for the LTI to deliver a reward to executives, the Company’s TSR must beschedule is appropriate? better than that of at least half the companies in one or both comparator groups.



What does an executive pay on grant and No amount is payable on grant or vesting of the SARs. exercise of the SARs or options?

Options are granted at no cost to the executive, however, an exercise price is payable on exercise of the options. The exercise price is the volume weighted average price of theCompany’s shares over the five business days up to and including the award date. This difference is reflected in the different numbers of SARs and options granted.

What happens on cessation of employment? SARs which have not already vested and options which are not exercisable will, in general, lapse and be forfeited. If cessation is due to death, redundancy or where the Board otherwiseapproves, a proportionate number of SARs may vest or options may be exercised, at the Board’sdiscretion, or otherwise based on pro rata performance.

Can the SARs or options be forfeited? Yes. If the performance conditions are not satisfied unvested SARs or options will lapse. If anexecutive acts fraudulently, dishonestly or is, in the Board’s opinion, in breach of his or herobligations to the Company, unvested SARs or options will lapse.

What happens in the event of a capital The rules of the SESPP and SESOP provide for the adjustment of the number of shares to whichreconstruction or bonus issue etc? the SARs or options relate to take account of capital reconstructions and bonus issues. In the

event of a change in control, the Board may determine whether, and the extent to which, SARsand options may vest.

Are there trading restrictions on the Shares allocated on vesting of a SAR are subject to a restriction on dealing for up to a maximumunderlying shares? of 10 years after the original date of grant.

TABLE 7: VESTING SCHEDULE FOR SARS AND OPTIONSPerformance – Santos TSR ranking against TSR ranking % of SARs that vest or optionsof each company in the comparator group which become exercisable

TSR < 50th percentile of comparator group 0%

TSR = 50th percentile of comparator group 50%

TSR between 51st & 74th percentile of comparator group Progressive vesting from 52% to 98% pro-rata vesting

(2% increase for each percentile improvement)

TSR ≥ 75th percentile of comparator group 100%



SARs or options granted as remunerationThe following table sets out details of the movement in SARs and options held by the CEO and specified executives during the reporting period.

TABLE 8: MOVEMENT IN SARS AND OPTIONS HELD BY EXECUTIVESVested and

Lapsed/ Balance at exercisable atBalance at Exercised Forfeited 31 December 31 December

1 January 2005 Granted2 3, 4, 5, 6 7 2005 2005

CEO and Specified Executives

J C Ellice-Flint, CEO1 3,000,000 - (3,000,000) - - -

J E Gouadain, Vice President Geoscience and New Ventures 200,000 60,000 - - 260,000 220,000

P C Wasow, Chief Financial Officer 150,000 70,800 (150,000) - 70,800 23,600

R J Wilkinson, Vice President Gas Marketing and Commercialisation - 53,100 - - 53,100 17,700

B J Wood, Vice President Strategic Projects 95,085 165,900 (50,000) - 210,985 45,085

J T Young,Executive Vice President Operations 250,000 78,000 (250,000) - 78,000 26,000

M E J Eames, Vice President Corporate and People - 69,600 - - 69,600 -

Former executives

P D Moore, Vice President Development Projects and Technical Services 125,000 53,100 (125,000) (53,100) - -

Total 3,820,085 550,500 (3,575,000) (53,100) 742,485 332,3851 3,000,000 options were granted to John Ellice-Flint on his appointment.

The performance conditions applicable to the options were based on achieving a 10% TSR growth over the performance period applicable to each tranche of options. Tranches 1 and 2 of the optionssatisfied the performance conditions in previous financial years and were exercised on 2 March 2005. During the current reporting period, the performance condition applying to Tranche 3 wassatisfied and the options were exercised on 2 September 2005. The exercise price paid by the CEO to the Company was $5.83 for each option exercised.

2 The aggregate value of SARs and options granted during the year (as at the date of their grant) is $1,595,190.

3 The value of an option on the date of exercise is the market price of a share in the Company on that date. Accordingly, the aggregate value of options exercised during the financial year was$35,306,000.



4

TABLE 9: OPTIONS EXERCISED DURING 2005

Market PriceExercise at date

Date Exercised Exercised Price $ of exercise

CEO & Specified Executives

J C Ellice-Flint, CEO 2 March 2005 2,000,000 5.83 8.662 September 2005 1,000,000 5.83 11.52

J E Gouadain, Vice President Geoscience and New Ventures - - - -

P C Wasow, Chief Financial Officer 30 August 2005 150,000 6.20 11.52

R J Wilkinson, Vice President Gas Marketing and Commercialisation - - - -

B J Wood, Vice President Strategic Projects 1 September 2005 50,000 6.69 11.51

J T Young, Executive Vice President Operations 5 September 2005 250,000 6.69 11.15

M E J Eames, Vice President Corporate and People - - - -

Former executive

P D Moore, Vice President Development Projects and Technical Services 19 August 2005 25,000 6.52 11.0019 August 2005 100,000 6.20 11.00

5 No SARs were exercised during 2005.

6 No SARs or options were exercised or forfeited during 2004.

7 During the year, the right to 53,100 SARs held by Mr P D Moore were forfeited on his resignation 21 November 2005. No options were forfeited during the reporting period. The value of a SAR oroption on the day it lapses or is forfeited is nil.

E. SERVICE AGREEMENTSThe remuneration and other terms of employment for the CEO and the specified senior executives are formalised in Service Agreements. Under the terms of the Service Agreements, the CEO and other members of the senior executive team continue to be employed until theiremployment is terminated.

Notice periods and payments on terminationThe Service Agreements provide for termination payments to be made in certain circumstances.

In particular, the CEO’s contract (entered into in 2000) provided that the Company may terminate his employment on giving 24 months’ notice,and that the CEO must give the Company three months notice of his intention to resign.

In lieu of part or all of this notice period, the Company may pay the CEO an amount equal to a proportion or multiple of his annual base salary andthe current year’s potential bonus at the time at which notice is given.

Pursuant to the terms of the new contract entered into with the CEO, the Company’s notice period is amended so that, as from 1 January 2008, it is reduced to 12 months.

The Company may terminate the employment of other executives on giving three months notice, except with respect to Mr P C Wasow who is entitled to six months notice. The Company may make a payment in lieu of notice. In general, the CEO and other senior executives must give the Company at least three months notice of resignation. In certain circumstances, such as a substantial diminution of responsibility, the Company may be deemed to have terminated the employment of the CEO and the specified senior executives and will be liable to makecompensation payments.

The potential liability of the Company in relation to the termination of employment of other Group executives is dependent upon the circumstancesof the termination, together with the Company’s policies and arrangements. As the potential for liability is dependent upon the circumstances inwhich an executive ceases employment, it is not possible to quantify the potential future impact of these agreements on the Company’s financialposition. However, the Company’s policy in relation to these potential obligations is to make provision on an annual basis when a presentobligation arises.

In addition, under his Service Agreement, the CEO is entitled to the accelerated payment of certain short term and long term incentives on theoccurrence of certain specified events, including a change of control.



F. R

EMU

NER

ATIO

N P

AID

AND

OTH

ER S

PECI

FIC

DISC

LOSU

RES

Deta

ils o

f the

rem

uner

atio

n pa

id to

the

CEO

and

each

of t

he S

peci

fied

Exe

cuti

ves

duri

ng 2

005

and

2004

are

set

out

in th

e fo

llow

ing

tabl

es. A

ll va

lues

are

in A

$ un

less

oth

erw

ise

stat

ed.

TABL

E 10

: EX

ECU

TIVE

REM

UN

ERAT

ION

DIS

CLOS

URE

S FO

R 20

05 F

INAN

CIAL

YEA

R Ot

her

long

term

Shor

t ter

m e

mpl

oyee

ben

efit

sPo

st e

mpl

oym

ent

Shar

e ba

sed

paym

ents

2, 3

, 4Te

rmin

atio

nbe

nefi

tsTo

tal

Fixe

d sa

lary

STI

Othe

r1Su

pera

nnua

tion

SARs

Opti

ons

$$

$$

$$

$$

$

CEO

and

Spec

ifie

d Ex

ecut

ives

of

the

Com

pany

and

the

Gro

up

J C

Ellic

e-Fl

int,

CE

O51,

300,

000

1,65

7,50

05,

915

270,

8786

--

--

3,23

4,29

3

J E

Goua

dain

, Vi

ce P

resi

dent

Geo

scie

nce

and

New

Ven

ture

s43

5,38

719

0,00

05,

915

34,5

8524

7,80

0-

--

913,

687

P C

Was

ow,

Chie

f Fin

anci

al O

ffic

er50

0,31

233

0,10

05,

915

14,9

5929

2,40

4-

--

1,14

3,69

0

R J

Wilk

inso

n,Vi

ce P

resi

dent

Gas

Mar

keti

ng

and

Com

mer

cial

isat

ion

328,

906

156,

500

5,91

527

,018

219,

303

--

-73

7,64

2

B J

Woo

d,

Vice

Pre

side

nt S

trat

egic

Pro

ject

s33

5,37

013

8,00

05,

915

25,8

68-

145,

992

--

651,

145

J T

Youn

g,

Exec

utiv

e Vi

ce P

resi

dent

Ope

rati

ons

549,

613

424,

900

5,91

511

,585

322,

140

--

-1,

314,

153

M E

J E

ames

, Vi

ce P

resi

dent

Cor

pora

te a

nd P

eopl

e37

5,56

517

6,40

05,

915

39,4

3490

,748

57,5

00-

-74

5,56

2

Form

er e

xecu

tive

s

P D

Moo

re,

Vice

Pre

side

nt D

evel

opm

ent

Proj

ects

and

Tec

hnic

al S

ervi

ces7

316,

009

-5,

283

36,7

4821

9,30

3-

41,5

47-

618,

890

Tota

l4,

141,

162

3,07

3,40

046

,688

461,

075

1,39

1,69

820

3,49

241

,547

-9,

359,

062

1In

clud

es t

he c

ost

of c

ar p

arki

ng p

rovi

ded

in t

he C

ompa

ny’s

head

off

ice

in A

dela

ide.

2In

acc

orda

nce

wit

h th

e re

quire

men

ts o

f th

e Ac

coun

ting

Sta

ndar

ds,

rem

uner

atio

n in

clud

es a

pro

port

ion

of t

he n

otio

nal v

alue

of

equi

ty c

ompe

nsat

ion

gran

ted

or o

utst

andi

ng d

urin

g th

e ye

ar.

The

noti

onal

val

ue o

f eq

uity

ins

trum

ents

whi

ch d

o no

tve

st d

urin

g th

e re

port

ing

perio

d is

det

erm

ined

as

at t

he g

rant

dat

e an

d is

pro

gres

sive

ly a

lloca

ted

over

the

ves

ting

per

iod.

The

am

ount

inc

lude

d as

rem

uner

atio

n is

not

rel

ated

to

or i

ndic

ativ

e of

the

ben

efit

(if

any

) th

at i

ndiv

idua

l exe

cuti

ves

may

ulti

mat

ely

real

ise

shou

ld t

he e

quit

y in

stru

men

ts v

est.

The

not

iona

l val

ue o

f SA

Rs a

nd o

ptio

ns a

s at

the

dat

e of

the

ir g

rant

has

bee

n de

term

ined

in

acco

rdan

ce w

ith

AASB

124

“Re

late

d Pa

rty

Disc

losu

res”

app

lyin

g th

e M

onte

Car

lo v

alua

tion

met

hod.

Det

ails

of

the

assu

mpt

ions

und

erly

ing

the

valu

atio

n ar

e se

t ou

t in

Not

e 19

to

the

fina

ncia

l sta

tem

ents

.

3As

not

ed a

bove

, th

e CE

O w

as g

rant

ed o

ptio

ns a

t th

e ti

me

his

empl

oym

ent

wit

h th

e Co

mpa

ny c

omm

ence

d. I

n re

spec

t of

sen

ior

exec

utiv

es,

a ra

nge

of 2

0% -

23%

of

each

exe

cuti

ve’s

rem

uner

atio

n fo

r th

e fi

nanc

ial y

ear

cons

ists

of

gran

ts o

f SA

Rs o

rop

tion

s.

4Th

e to

tal n

umbe

r of

SAR

s an

d op

tion

s gr

ante

d in

200

5 re

pres

ent

thre

e se

para

te g

rant

s at

the

sam

e ti

me.

Whi

le o

ne o

f th

e th

ree

was

the

nor

mal

gra

nt f

or 2

005,

the

oth

er t

wo

wer

e ne

cess

ary

as c

atch

-ups

for

the

gra

nts

that

wou

ld o

rdin

arily

hav

eta

ken

plac

e in

200

3 an

d 20

04.

The

reas

on t

hese

gra

nts

did

not

take

pla

ce a

t th

e ap

prop

riate

tim

e w

as d

ue t

o th

e su

spen

sion

of

the

LTI

prog

ram

to

enab

le a

tho

roug

h re

view

of

its

desi

gn,

whi

ch w

as c

ompl

eted

in

late

200

4.



5Th

e CE

O’s

rem

uner

atio

n pa

ckag

e fo

r 20

05 a

lso

inco

rpor

ated

a lo

ng t

erm

inc

enti

ve e

lem

ent

in t

he f

orm

of

1,00

0,00

0 op

tion

s. T

his

was

the

thi

rd t

ranc

he o

f a

gran

t of

opt

ions

mad

e at

the

tim

e of

his

app

oint

men

t in

Dec

embe

r 20

00.

Thes

e op

tion

sw

ere

subj

ect

to a

TSR

per

form

ance

hur

dle

and

had

an e

xerc

ise

pric

e of

$5.

83.

The

opti

ons

vest

ed d

urin

g th

e ye

ar a

nd w

ere

exer

cise

d in

Sep

tem

ber

2005

. In

acc

orda

nce

wit

h th

e AI

FRS

Acco

unti

ng S

tand

ards

, as

the

se o

ptio

ns w

ere

gran

ted

prio

rto

7 N

ovem

ber

2002

, no

acc

ount

ing

valu

e ha

s be

en a

ttri

bute

d to

the

se o

ptio

ns i

n th

e fi

nanc

ial s

tate

men

ts o

r fo

r th

e pu

rpos

es o

f re

mun

erat

ion

disc

losu

re i

n 20

05.

This

pos

itio

n di

ffer

s fr

om t

he a

ccou

ntin

g tr

eatm

ent

adop

ted

in 2

004,

whe

re a

noti

onal

val

ue w

as i

nclu

ded

for

the

opti

ons

on i

ssue

dur

ing

2004

(se

e Ta

ble

11 b

elow

).

6Th

is a

mou

nt r

efle

cts

the

acco

unti

ng v

alue

asc

ribe

d to

the

sup

eran

nuat

ion

bene

fit

refle

ctin

g th

e se

rvic

es p

rovi

ded

duri

ng t

he p

erio

d. T

he a

ctua

l con

trib

utio

n m

ade

duri

ng 2

005

by t

he C

ompa

ny i

n re

spec

t of

the

cur

rent

and

fut

ure

enti

tlem

ents

of

the

CEO

was

$63

7,00

0.

7M

r P

D M

oore

cea

sed

empl

oym

ent

wit

h th

e Co

mpa

ny o

n 21

Nov

embe

r 20

05 a

nd h

is 5

3,10

0 SA

Rs,

at t

he v

alue

of

$219

,303

, la

psed

.

TABL

E 11

: EX

ECU

TIVE

REM

UN

ERAT

ION

DIS

CLOS

URE

S FO

R 20

04 F

INAN

CIAL

YEA

R Ot

her

Post

lo

ng te

rm

Shor

t ter

m e

mpl

oyee

ben

efits

empl

oym

ent

Shar

e ba

sed

paym

ents

2, 3

Term

inat

ion

bene

fits

Tota

l

Fixe

d sa

lary

STI

Othe

r1Su

pera

nnua

tion

SARS

Opti

ons

$$

$$

$$

$$

$

CEO

and

Spec

ifie

d Ex

ecut

ives

of

the

Com

pany

and

the

Gro

up

J C

Ellic

e-Fl

int,

CE

O1,

050,

000

1,30

0,00

05,

399

274,

569

-27

4,32

6-

-2,

904,

294

J E

Goua

dain

, Vi

ce P

resi

dent

Geo

scie

nce

and

New

Ven

ture

s37

1,32

717

6,60

030

,912

29,1

3258

,939

18,7

31-

-68

5,64

1

P D

Moo

re,

Vice

Pre

side

nt D

evel

opm

ent

Proj

ects

and

Tec

hnic

al S

ervi

ces

311,

734

140,

600

27,3

9932

,657

58,8

1915

,674

--

586,

883

P C

Was

ow,

Chie

f Fin

anci

al O

ffic

er44

4,38

930

7,20

05,

399

49,3

6179

,052

20,0

00-

-90

5,40

1

R J

Wilk

inso

n,

Vice

Pre

side

nt G

as M

arke

ting

an

d Co

mm

erci

alis

atio

n31

1,87

516

9,80

05,

399

27,4

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MAJOR ANNOUNCEMENTS MADE BY SANTOS DURING 2005

7 Jan Recommencement of Dividend Reinvestment Plan

19 Jan Santos goes direct with its own marketing of Minerva gas

20 Jan Jeruk 2/ST3 well results

24 Jan 2004 Fourth Quarter Activities Report: record $1.5 billionrevenue

24 Jan Open briefing with Corporate File on Jeruk oil discovery

27 Jan 2005 exploration program announced

3 Feb Hiu Aman discovery in Indonesia’s Kutei Basin

15 Feb Santos reserves replacement at 121% in 2004

17 Feb Santos acquires OMV’s Gippsland and Cooper Basin assets

23 Feb Two new Directors appointed to Santos Board

23 Feb 2004 Full Year Results: 16% profit improvement

30 Mar First production from Mutineer-Exeter oil development

8 Apr Casino gas project awarded a production licence

14 Apr Go-ahead for Santos’ first Indonesian development

25 Apr Gas contract awarded for new Qld Braemar power station

27 Apr 2005 First Quarter Activities Report: strong opening quarterfor Santos

20 May 2005 Annual General Meeting: Santos growth outlookstronger than ever

31 May Indonesian gas sales agreement signed for Maleo

7 Jun Adoption of Australian equivalents to International FinancialReporting Standards

15 Jun Kipper partners apply for a production licence

27 Jun Additional Egyptian acreage awarded

1 Jul Announcement of acquisition of Tipperary Corporation

6 Jul Sorell Basin exploration position strengthened

19 Jul Golden Beach interest divested

27 Jul 2005 Second Quarter Activities Report: record $1.02 billionfirst half revenue

2 Aug Henry 1, new gas discovery offshore Victoria

5 Aug New exploration position in Kyrgyzstan, central Asia

9 Aug Bayu-Undan LNG sales contract executed

17 Aug Santos to supply gas to WA Kwinana power station

18 Aug Additional Gippsland Basin interests acquired

25 Aug 2005 Interim Results: first half profit of $290 million

15 Sep First production from John Brookes gas development

21 Sep Interest in Timor Sea exploration permit divested

26 Sep Investor update: UK/US investor presentation

29 Sep Caldita gas field discovered offshore Northern Territory

26 Oct 2005 Third Quarter Activities Report: record quarterlyrevenue

28 Oct Acquisition of Tipperary Corporation approved

2 Nov Acreage awarded adjoining Caldita gas discovery

28 Nov Santos and Indigenous community join forces to openUndurana Camel Farm

30 Nov Santos Investor Seminar presentations and audio

12 Dec Open briefing with Corporate File on Cooper oil program and Fairview

19 Dec Drilling report for Firebird 1

22 Dec Santos in new tolling and purchase contract for Nexus’Longtom gas field

22 Dec Moomba insurance claim settled


Dates shown are when announcements were made to the exchanges where Santos’ shares are listed: the Australian Stock Exchange (ASX) andNASDAQ. As part of Santos’ continuous disclosure, the Company informs the market of information that may affect the Company’s share price. All material announcements disclosed to the ASX are published on Santos’ website, www.santos.com.



STEPHEN GERLACHLLB

Age 60. Director since 5 September 1989 and Chairman since 4 May 2001. Chairman of Santos Finance Ltd and of the Safety,Health and Environment Committee, FinanceCommittee and Nomination Committee andmember of the Remuneration Committee ofthe Board. Chairman of Futuris CorporationLtd and Challenger Listed Investments Ltd.Director of Elders Rural Bank. FormerManaging Partner of the Adelaide legal firm,Finlaysons. Former Chairman of Amdel Ltdand Equitorial Mining Ltd. A Trustee of theAustralian Cancer Research Foundation,Chairman of Foodbank SA and a Director of Foodbank Australia.

JOHN CHARLES ELLICE-FLINT BSc (Hons)

Age 55. Managing Director since 19 December 2000, member of the Safety,Health and Environment Committee of theBoard, Director of Santos Finance Ltd andalso Chairman of other Santos Ltd subsidiarycompanies. Thirty-four years’ experience inthe international oil and gas industryincluding twenty-eight years with Unocal,including as Senior Vice President: GlobalExploration and Technology and VicePresident: Corporate Planning andEconomics. Member and Chair of the SouthAustralian Museum Board. Member of APPEACouncil and Member of the Energy Governorsof the World Economic Forum.

KENNETH ALFRED DEANBCom (Hons), FCPA, MAICD

Age 53. Independent non-executive Directoreffective 23 February 2005. Director of SantosFinance Ltd (appointed 30 September 2005),Chairman of the Audit Committee(appointment effective 30 September 2005)and member of the Finance Committee(appointed 30 September 2005). ChiefFinancial Officer of Alumina Ltd, non-executive Director of Alcoa of Australia Ltd,Alcoa World Alumina and related companies.Fellow of the Australian Society of CertifiedPractising Accountants and member of theAustralian Institute of Company Directors.Former Chief Executive Officer of ShellFinancial Services, former non-executiveDirector of Woodside Petroleum Ltd andmember of the La Trobe University Council.

RICHARD MICHAEL HARDINGMSc

Age 56. Director since 1 March 2004 andmember of the Audit Committee, Safety,Health and Environment Committee andRemuneration Committee of the Board.Former President and General Manager of BP Developments Australia Limited andformer Vice-Chairman and Council member of the Australian Petroleum Production andExploration Association. Chairman of theMinistry of Defence Project Governance Board– Land Systems Division (Army) and Directorof Arc Energy Ltd.

MICHAEL ANTHONY O’LEARYDipMinE, BSc, FAusIMM, FAIM, FAICD

Age 70. Director since 15 October 1996 and member of the Safety, Health andEnvironment Committee, NominationCommittee and Finance Committee of theBoard. Director of Newcrest Mining Ltd.Former Chairman of Hamersley Iron, ArgyleDiamonds, Dampier Salt, former DeputyChairman of Bank of Western Australia Ltdand former Director of Rio Tinto Ltd and Rio Tinto plc.

CHRISTOPHER JOHN RECNYBSc, MSc, MBA

Age 52. Independent non-executive Directoreffective 23 February 2005. Extensiveinternational management and projectmanagement experience, including as global head of international consultancyL.E.K.’s natural resources practice – acompany he helped establish in the 1980s.Regional head of Asia-Pacific for L.E.K. andpreviously spent eight years with FluorCorporation as a project manager on, andundertaking feasibility studies for, majorresource developments.

PROF. JUDITH SLOANBA (Hons), MA, MSc

Age 51. Director since 5 September 1994.Chairperson of the Remuneration Committeeand member of the Audit Committee andNomination Committee of the Board. Part-time Commissioner of the ProductivityCommission. Former Professor of LabourStudies at the Flinders University of SouthAustralia and Director of the National Instituteof Labour Studies. Former Chairperson of SGICHoldings Ltd and Director of Mayne Group Ltd.

BOARD OF DIRECTORS


MARTYN EAMESVice President Corporate and PeopleBSc (Hons)

Martyn Eames is responsible for the leadershipof the corporate groups including sharedbusiness services, human resources, corporateaffairs, environment, health, safety andsustainability, government and Indigenousaffairs and media relations. Martyn joinedSantos in December 2004 and was formerly VicePresident Strategy and Business Planning withBP Angola. His career spans more than 25 yearswith BP, working various upstream roles inAngola, Canada, Australia, Papua New Guinea,Norway, the UK and the United States.

GARY CHRISTENSONPresident IndonesiaBA Geology; post graduate studies geology;S.E.P.

Gary Christenson is responsible for maturingSantos’ emerging core area in Indonesia. Gary joined Santos in March 2005 afterspending seven years with Unocal where he was most recently General Manager forUnocal Makassar Ltd and Senior VicePresident Deepwater Exploration andProduction in Jakarta, Indonesia. Gary hasmore than 23 years of industry experienceincluding 15 years of international oil and gas management experience in Asia andAfrica, and has also worked for Keltex Energy, British Gas, and Tenneco Oil.

KATHY HOGENSONPresident USABS Chem Eng

Kathy Hogenson joined Santos as president of Santos USA Corp in May 2001 and isresponsible for all of the Company’s activitiesin the United States. Before joining Santos,Kathy worked for Unocal Corporation as vicepresident of Exploration and ProductionTechnology and was responsible for globaltechnology, technical excellence practices,quality assurance and global procurement.She has held leadership positions with US andforeign majors and independent operators,including six years of assignments in SouthEast Asia and South America.

TREVOR BROWNVice President Geoscience and New VenturesBSc (Hons)

Trevor Brown leads a team of highly qualifiedgeoscientists to implement a challengingexploration strategy, with responsibility forall exploration, appraisal and new ventureactivities in the Company. Trevor was mostrecently Santos’ Manager Growth Projects,having joined the Company in 2001 from USindependent oil company Unocal where hewas part of an active exploration group. He has over 20 years of experience in the oil and gas industry, including 11 years inIndonesia managing onshore and offshoreexploration programs.

WILF LAMMERINKActing Vice President Development Projectsand Technical ServicesBSc (Hons)

Wilf Lammerink is currently responsible forthe development portfolio of the Company,including operated and non-operatedprojects, subsurface engineering, drilling andtechnical services. Wilf has been engaged inthe international oil and gas industry formore than 25 years, initially as a petroleumengineer with Shell International, then in avariety of petroleum engineering, technicalmanagement and business development roleswith Fletcher Challenge Energy in NewZealand, Canada and Brunei. Wilf also has therole of Manager Development Portfolio,having joined Santos in 2001.

RICK WILKINSONVice President Gas Marketing andCommercialisationBSc (Hons), Adv Industrial Marketing,Postgrad Pet Eng and Geology

Rick Wilkinson is responsible for gas and liquids marketing, commercialisingdiscovered resources and developing new gasbusiness. Rick was formerly General ManagerSouthern Australia. Before joining Santos in1997, he was Group Manager Energy Retail forthe Victorian Gas and Fuel Corporation,responsible for energy trading, customerrelations, marketing and sales. He has alsoheld various engineering, strategy andmanagement positions with Schlumberger,McKinsey & Co and Pilkington Glass.


LEADERSHIP TEAM


JON YOUNGExecutive Vice President OperationsBSc, BEng Chemical

Jon Young is responsible for all of Santos’production operations, including delineationand development of onshore Australianoperations, facilities engineering,maintenance and environment, health andsafety. Jon joined Santos in February 2000 asGeneral Manager of the former South AustraliaBusiness Unit, then from February 2002 wasGeneral Manager of the Central AustraliaBusiness Unit. Prior to joining Santos, Jonhad a varied and international 17-year careerwith Mobil Corporation. His most recent rolewith Mobil was Chief Executive Officer, IndoMobil Ltd, based in New Delhi, India.

PETER WASOWChief Financial OfficerBCom, GradDipMgmt, FCPA

Peter Wasow is responsible for corporatedevelopment, corporate strategy andplanning, investor relations, accounting,corporate finance, taxation and audit. Peterjoined Santos in May 2002 following a variedand international 23-year career with BHPBilliton. His roles included Vice PresidentFinance and Administration for BHPPetroleum in Houston, Texas. His most recentrole was Vice President Finance, in the BHPcorporate office, Melbourne.

WESLEY GLANVILLEManaging Counsel and Company SecretaryLLB, BA, GDLP, MAICD

Wesley Glanville is responsible for the Office of General Counsel, comprising the Company’soperational and corporate legal function,Secretariat and Share Registry. Wesley joinedSantos from private practice in January 1997and has previously been responsible formanaging the legal requirements of Santos’offshore exploration, development andproduction operations. Wesley is admitted topractice in the Supreme Court of South Australiaand the High Court of Australia and has over 15 years’ experience advising Australianresources companies as in-house counsel and as an external advisor.


VICE PRESIDENT

GEOSCIENCE AND

NEW VENTURES

*Bruce Wood held this position during 2005 prior to his resignation in March 2006. A replacement has not yet been appointed.

VICE PRESIDENT

GAS MARKETING AND

COMMERCIALISATION

VICE PRESIDENT

DEVELOPMENT PROJECTS AND

TECHNICAL SERVICES

EXECUTIVE VICE PRESIDENT

OPERATIONS

VICE PRESIDENT

STRATEGIC PROJECTS*

CHIEF FINANCIAL

OFFICER

MANAGINGCOUNSEL

AND COMPANYSECRETARY

VICE PRESIDENT

CORPORATE AND PEOPLE

PRESIDENT INDONESIA

PRESIDENT USA

SANTOS CORPORATE STRUCTURE



SANTOS GROUP INTERESTSAs at 28 February 2006

Licence Area % Interest

SOUTH AUSTRALIA

(PPL = Petroleum Production Licence; PL = Pipeline Licence)

Cooper Basin* (Fixed Factor Area)

(PPLs 6-20, 21-61, 63-75, 78-117, 119, 120, 124, 126-130, 132-135, 137-141, 143-146, 148-151, 153-155, 157, 159-166,169-181, 183-186, 188-190, 192, 193, 195, 196, 198 and 199) 66.6

Patchawarra East Joint Operating Area*(PPLs 26, 76, 77, 118, 121-123, 125, 131,136, 142, 147, 152, 156, 158, 167, 182,187, 191 & 197) 72.3

Derrilyn Unit* (PPL 206/208) 65.0

Reg Sprigg West 1 Unit*(PPL 194/211) 52.0

Downstream*(PL2) 66.6

QUEENSLAND

(PL = Petroleum Lease; PPL = Pipeline Licence)

South-West Queensland*

ATP 259PNaccowlah (PLs 23-26, 35, 36, 62, 76-79, 82, 87, 105, 107, 109, 133, 149, 175, 181, 182 & 189) 55.5

Total 66 (PLs 34, 37, 63, 68, 75, 84, 88,110, 129, 130, 134, 140, 142-144, 150, 168, 178, 186, 193, PPL8 & PPL14) 70.0

Wareena (PLs 113, 114, 141, 145, 148, 153, 157, 158, 187 & 188) 61.2

Innamincka (PLs 58, 80, 136, 137, 156 & 159) 70.0

Alkina 72.0

Aquitaine A (PLs 86, 131, 146, 177 & 208) 52.5

Aquitaine B (PLs 59-61, 81, 83, 85, 97, 106, 108, 111, 112, 132, 135, 139, 147,151, 152, 155, 205 & 207) 55.0

Aquitaine C (PLs 138 & 154) 47.8

50/40/10 (PL 55) 60.0

SWQ Unit (PPLs 13, 16-18, 31, 34, 35, 36-40, 46-48, 62, 64-72, 78-82, 84, 86, 94-96, 98, 100, 101 & 105, 113 and in South Australia PLs 5 & 9) 60.1

ATP267P (Nockatunga)(PLs 33,50 & 51) 59.1

ATP 299P(Tintaburra)(PLs 29, 38, 39, 52,57, 95,169 & 170, PPLs 109, 110 & 112) 89.0


Surat Basin

ATP 212P (Major) (PLs 30, 56 & 74) 15.0

ATP 336P (Roma) (PLs 3-13, 93 & PPL2)* 85.0

ATP 336P (Waldegrave) (PLs 10-12, 28, 69 & 89)* 46.3

ATP 470P (Redcap) (PL 71) 10.0

ATP 471P (Bainbilla) (PL 119 & PPL 58) 16.7

ATP 471P (Myall) (PL 192 & PPL 87) 51.0

Boxleigh* 100.0

PL 1 (Moonie)* 100.0

PL 1 (2) (Cabawin Exclusion)* 100.0

PL 1 (2) (Cabawin Farm-out)* 50.0

PL 2 (A & B) (Kooroon)* 52.5

PL 2 (Alton)* 100.0

PL 2C (Alton Farm-out)* 63.5

PL 5 (Drillsearch)* 21.3

PL 5 (Mascotte)* 42.5

PL 11 (Snake Creek East)* 25.0

PL 12 (Trinidad)* 92.5

PL 17 (Bennett)* 70.0

PL 17 (Bennett Exclusion)* 100.0

PPL 119 (Downlands East Exclusion) 28.8

ATP 470P (Formosa Downs) 5.5

ATP 526 (PLs 90-92, 99-100 & 232-236, PPLs76 & 92) Fairview* 71.7

ATP 653P (Fairview)* 71.7



PL 17 (Leichardt Exclusion)* 70.0

PLs 21, 22, 27 & 64 (Balonne) 12.5

Bowen Basin

ATP 337P (Denison)* (PLs 41-45, 54, 67, 173, 183, 218, PPL10 & PPL11) 50.0

ATP 337P (Mahalo)* 40.0

PL176 (Scotia)* 100.0

ATP 553P (Denison)* 50.0

ATP 685P (Cockatoo Creek) 50.0


Facilities

Wungoona Processing Facilities* 50.0

Moonie to Brisbane Pipeline* 100.0

Jackson Moonie Pipeline (PPL 6)* 82.8

Comet Ridge to Wallumbilla Pipeline (PPL 118)* 100.0

VICTORIA

Otway Basin (Onshore)

PEP 160 30.0

Otway Basin (Offshore)

VIC/P44 (Casino)* 50.0

VIC/P51* 55.0

VIC/P52* 33.3

VIC/RL7 (La Bella) 10.0

VIC/L22 (Minerva) 10.0

Gippsland Basin

VIC/RL2 (Kipper) 7.1

VIC/RL3 (Sole)* 100.0

VIC/L21 (Patricia-Baleen)* 100.0

VIC/L24 50.0

VIC/P55* 100.0

OFFSHORE SOUTH AUSTRALIA

Duntroon Basin*

EPP 32 100.0

OFFSHORE TASMANIA

Sorell Basin*

T/32P 50.0

T/33P 80.0

T/35P 50.0

T/36P 50.0

T/40P 100.0

NORTHERN TERRITORY

Amadeus Basin

OL 3 (Palm Valley) 48.0

Ls 4 and 5 (Mereenie)* 65.0

RL2 (Dingo)* 65.7

Mereenie-Brewer Estate Pipeline* 65.0




OFFSHORE NORTHERN AUSTRALIA

Carnarvon Basin

EP 61 28.6

EP 62 28.6

EP 357 35.7

L1H (Barrow Island) 28.6

L10 28.6

L12 (Crest) 35.7

L13 (Crest) 35.7

TL/2 (Airlie) 15.0

TL/3 (Banta-Triller) 28.6

TL/7 (Thevenard) 35.7

TP/2 28.6

TP/7 (1-3) 43.7

TP/7 (4) 18.7

TR/4 (Australind) 35.7

WA-1-P 22.6

WA-7-L 28.6

WA-8-L (Talisman) 37.4

WA-13-L (East Spar) 45.0

WA-15-L (Stag) 66.7

WA-20-L (Legendre) 22.6

WA-26-L (Mutineer)* 33.4

WA-27-L (Exeter)* 33.4

WA-29-L (John Brookes) 45.0

WA-33-R (Maitland) 18.7

WA-191-P (Mutineer-Exeter)* 33.4

WA-208-P* 31.3

WA-209-P (Reindeer) 45.0

WA-214-P (John Brookes) 45.0

WA-246-P 15.0

WA-264-P* 50.0

Browse Basin*

WA-274-P 50.0

WA-281-P 90.0

Bonaparte Basin*

NT/P67 100.0

NT/RL1 (Petrel) 95.0

WA-6-R (Petrel West) 95.0

WA-18-P (Tern) 100.0


WA-27-R (Tern) 100.0

Houtman Basin

WA-328-P 33.0

WA-339-P* 100.0

Timor Sea

AC/L1 (Jabiru) 10.3

AC/L2 (Challis) 10.3

AC/L3 (Cassini) 10.3

NT/P48 (Evans Shoal) 40.0

NT/P61 40.0

NT/P69 40.0

Timor Gap

JPDA 03-12 19.3

Bayu-Undan Gas Field 10.6

Elang 21.4

PAPUA NEW GUINEA

PDL 1 (Hides) 31.0

PDL 3* 15.9

PL 3 3.6

PPL 206* 48.0

PPL 228 40.0

PRL 4* 35.3

PRL 5* 35.3

PRL 9* 42.6

SE Gobe Unit 9.4

INDONESIA

East Java Basin

Brantas 18.0

Madura Offshore (Maleo)* 67.5

Nth Bali I* 30.0

Sampang (Oyong)* 40.5

Kutei Basin

Donggala* 50.0

Papalang 20.0

Popodi 20.0

West Natuna Basin

Kakap 9.0

West Papua Basin

Warim 20.0


EGYPT

Ras Abu Darag 50.0

South East July 20.0

North Zeit Bay 50.0

North Qarun 25.0

UNITED STATES OF AMERICA AVG WORKING INTEREST

East Texas

Black Horse* 100.0

Jefferson Co 18.8

Knight 30.0

South Texas

Bar Harbor 25.0

BP Green* 50.0

Coquat 25.0

Cougar* 100.0

Duncan Slough* 66.2

E. Edinburgh 20.8

Elsa 20.8

Hall Ranch* 58.3

Hordes Creek 46.7

Jaguar* 100.0

Kenedy Deep 55.0

Lafite/Allen Dome* 83.9

Markham 16.0

Mountainside 27.5

Port Acres, W 25.0

Nordheim SW 66.0

Raymondville 16.9

Tidehaven* 37.5

Thunder 60.0

South Louisiana

Howards Creek 25.0

Colorado/Nebraska

Frenchman 26.7

Lay Creek 50.0

Republican 20.0

Sand Hill* 100.0

State Line 25.0

* Santos operated.


6060

10 YEAR SUMMARY 1996–2005

As at 31 December 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Santos average realised oil price (A$/bbl) 27.43 27.42 20.95 27.57 46.54 45.53 44.74 43.59 51.83 73.83

Financial performance ($million)

Product sales revenue 729.2 778.5 769.4 944.5 1,497.1 1,459.7 1,478.4 1,465.0 1,500.9 2,462.8

Total revenue1 773.7 817.4 806.9 958.5 1,515.0 1,480.8 1,498.0 1,478.7 1,515.2 2,475.9

Foreign currency gains/(losses)3 25.0 3.6 2.0 0.3 2.7 0.2 (0.7) (7.9) 2.6 (3.8)

Profit from ordinary activities before tax3 331.9 322.3 267.3 339.6 725.9 627.6 493.3 430.9 518.8 1,133.5

Income tax relating to ordinary activities3 136.0 116.1 91.0 30.5 239.1 181.7 171.2 103.9 164.1 371.4

Net profit after income tax attributable to the shareholders of Santos Ltd3 195.9 206.2 176.3 309.1 486.8 445.9 322.1 327.0 354.7 762.1

Financial position ($million)

Total assets3 3,443.4 4,036.2 4,236.1 4,338.7 4,659.8 5,048.7 5,320.8 5,218.3 4,836.6 6,191.3

Net debt3 938.6 1,114.2 1,280.0 1,301.1 866.6 1,060.8 1,162.9 897.6 1,133.3 1,598.9

Total equity3 1,586.3 1,919.0 1,939.2 2,056.7 2,310.9 2,726.6 2,863.9 3,087.9 2,357.8 2,964.0

Reserves and production (mmboe)

Proven plus Probable reserves (2P) 860 1,009 966 941 921 724 732 636 643 774

Production 39.2 41.1 45.6 49.2 56.0 55.7 57.3 54.2 47.1 56.0

Exploration2

Wells drilled (number) 91 112 81 34 42 26 18 19 16 22

Expenditure ($million) 121.1 190.1 180.7 78.1 100.1 93.4 133.1 136.4 125.6 187.0

Other capital expenditure ($million)

Delineation and development2 105.8 179.7 158.1 116.8 187.1 308.1 308.8 519.0 672.7 666.1

Buildings, plant and equipment 150.3 205.4 165.7 102.5 153.5 258.7 319.0 94.9 131.1 106.0

Annual Report 2005


61Annual Report 2005 61Annual Report 2005

Share informationShare issues

As as 31 December 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005Employee Employee Employee Employee Employee Employee Employee Employee

Share Plan Share Plan Share Plan/ Share Plan/ Share Plan/ Share Plan/ Share Plan/ Share Plan/1 for 8 Executive Executive Executive Executive Executive Executive

rights issue Share Plan Share Plan/ Share Plan/ Share Plan/ Share Plan/ Share Plan/Exercise of Exercise of Exercise of Exercise of Exercise of

Options/ Options/ Options Options/ Options/Restricted Share Buy Preference Dividend

Shares -back/ Share ReinvestmentSchemes of Buy-Back/ Plan

Arrangement Issue ofFUELS/

ConvertiblePreference

Shares

Number of issued ordinary shares at year end (million) 539.6 607.3 607.8 608.2 610.4 579.3 583.1 584.7 585.7 594.4

Weighted average number of ordinary shares (million) 553.4 583.7 605.6 606.1 608.3 612.0 580.9 583.4 584.9 587.9

Dividends paid per ordinary share (¢)

- ordinary 23.0 25.0 25.0 25.0 30.0 30.0 30.0 30.0 30.0 36.0

- special - - - - - 10.0 - - - -

Dividends ($million)

- ordinary 123.6 142.5 151.4 151.5 182.0 184.8 174.2 175.0 175.5 212.4

- special - - - - - 61.2 - - - -

Number of issued preference shares at year end (million) - - - - - 3.5 3.5 3.5 6.0 6.0

Dividends paid per preference share ($)

- ordinary - - - - - - 5.40 6.57 6.59 5.10

- special - - - - - - - - 5.00 -

Dividends ($million)

- ordinary - - - - - - 18.9 23.0 23.0 30.6

- special - - - - - - - - 14.3 -

Earnings per share (¢)3 35.4 35.3 29.1 51.0 80.0 72.9 51.9 52.1 54.2 124.4

Return on total revenue (%)1, 3 25.3 25.2 21.8 32.2 32.1 30.1 21.5 22.1 23.4 30.8

Return on average ordinary equity (%)3 12.6 11.8 9.1 15.5 22.3 19.0 13.1 12.3 19.9 35.1

Return on average capital employed (%)3 9.4 8.5 7.0 11.4 16.5 13.9 8.9 8.8 11.7 19.8

Net debt/(net debt + equity) (%)3 37.2 36.7 39.8 38.7 27.3 28.0 28.9 22.5 32.5 35.0

Net interest cover (times)3 6.2 5.4 4.4 5.2 9.1 9.7 8.1 8.5 9.1 14.9

General

Number of employees (excluding contractors) 1,461 1,615 1,650 1,645 1,631 1,713 1,737 1,700 1,526 1,521

Number of shareholders 55,482 65,459 81,286 81,416 76,457 86,472 85,888 84,327 78,976 78,157

Market capitalisation ($million) 2,741 3,826 2,654 2,516 3,670 3,589 3,509 4,017 4,965 7,2801 From 2005, ‘Total operating revenue’ has been reclassified to ‘Total revenue’ and prior year amounts have been restated.2 From 2001, appraisal and near-field exploration wells have been reclassified from exploration to delineation expenditure. Prior year amounts have not been restated.3 From 2004, amounts reflect AIFRS. Prior year amounts reflect previous Australian Generally Accepted Accounting Principles and have not been restated.



FINANCIAL REPORT

CONTENTSDirectors’ Statutory Report 63

Financial Report

Income Statements 68

Balance Sheets 69

Cash Flow Statements 70

Statements of Recognised Income and Expense 71

Notes to the Consolidated Financial Statements

1 Significant Accounting Policies 722 Revenue and Other Income 793 Expenses 794 Earnings 805 Net Financing Costs 816 Income Tax Expense 817 Cash and Cash Equivalents 828 Trade and Other Receivables 829 Inventories 8210 Other Assets 8211 Exploration and Evaluation Assets 8312 Oil and Gas Assets 8413 Other Land, Buildings, Plant and Equipment 8614 Impairment of Cash Generating Units 8715 Other Investments 8816 Deferred Tax Assets and Liabilities 8817 Trade and Other Payables 8918 Interest-Bearing Loans and Borrowings 9019 Employee Benefits 9220 Provisions 10121 Other Liabilities 10222 Capital and Reserves 10223 Earnings per Share 10624 Consolidated Entities 10725 Acquisitions of Subsidiaries 10826 Interests in Joint Ventures 11027 Reconciliation of Cash Flows from Operating Activities 11128 Key Management Personnel Disclosures 11229 Related Parties 12130 Remuneration of Auditors 12131 Segment Information 12232 Commitments for Expenditure 12433 Contingent Liabilities 12534 Financial Instruments 12635 Economic Dependency 12836 Explanation of Transition to AIFRSs 12837 Changes in Accounting Policy 133

Directors’ Declaration 134

Lead Auditor’s Independence Declaration 135

Independent Audit Report 136



DIRECTORS’ STATUTORY REPORT

The Directors present their report together with the financial report of Santos Ltd (Santos or Company) and the consolidated financialreport of the consolidated entity, being the Company and its controlled entities, for the financial year ended 31 December 2005, and theauditor’s report thereon. Information in this Annual Report referred to by page number in this report, including the RemunerationReport, or contained in a Note to the financial statements referred to in this report is to be read as part of this report.

1. DIRECTORS, DIRECTORS’ SHAREHOLDINGS AND DIRECTORS’ MEETINGSThe names of Directors of the Company in office at the date of this report and details of the relevant interest of each of those Directors in sharesin the Company at that date are as set out below:

Surname Other Names Shareholdings inSantos Ltd

Ordinary FrankedShares Unsecured

Equity Listed

SecuritiesBarnett Peter Charles 12,394 Nil

Dean Kenneth Alfred 3,000 Nil

Ellice-Flint John Charles 4,000,000* Nil (Managing Director)

Gerlach Stephen 43,856 Nil(Chairman)

Surname Other Names Shareholdings inSantos Ltd

Ordinary FrankedShares Unsecured

Equity Listed

SecuritiesHarding Richard Michael Nil Nil

O’Leary Michael Anthony 4,898 Nil

Recny Christopher John Nil Nil

Sloan Judith 5,000 195

Details of the qualifications, experience and special responsibilities of each Director and the Company Secretary are set out on pages 36, 55and 57 respectively of this Annual Report.

Directors’ Meetings

The number of Directors’ Meetings and meetings of committees of Directors held during the financial year and the number of meetings attendedby each Director are as follows:

The above named Directors held office during and since the end of thefinancial year, except for Messrs KA Dean and CJ Recny, who wereappointed Directors on 23 February 2005. Mr GW McGregor held officeas a Director of the Company until his retirement on 30 September 2005.

Except where otherwise indicated, all shareholdings are of fully paidordinary shares.

*1,000,000 shares were issued on the terms described in Note 19 tothe financial statements and ceased to be restricted on 12 December2005.

No Director holds shares in any related body corporate, other than intrust for the Company.

Surname Other Names Safety, HealthDirectors’ Audit & Environment Remuneration Finance NominationMeetings Committee Committee** Committee Committee Committee

No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of No. of Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs Mtgs

Held* Attended Held* Attended Held* Attended Held* Attended Held* Attended Held* Attended

Barnett Peter Charles 14 12 - - 4 3 5 4 3 1 1 1Dean Kenneth Alfred 13 12 1 1 - - - - 1 1 - -Ellice-Flint John Charles 14 13 - - 4 4 - - - - - -Gerlach Stephen 14 14 - - 4 4 5 5 3 3 1 1Harding Richard Michael 14 12 5 4 - - - - - - - -McGregor Graeme William *** 10 8 4 4 - - - - 3 3 1 1O’Leary Michael Anthony 14 14 - - 4 4 - - - - - -Recny Christopher John 13 10 - - - - - - - - - -Sloan Judith 14 12 5 5 - - 5 5 - - - -* Reflects the number of meetings held during the time the Director held office, or was a member of the Committee, during the year.** In addition to formal meetings, the Committee participated in a site visit to Moomba.*** Retired as a Director of the Company on 30 September 2005.

As at the date of this report, the Company had an audit committee of the Board of Directors.

Particulars of the Company’s corporate governance practices appear on pages 34 to 39 of this Annual Report.



2. PRINCIPAL ACTIVITIESThe principal activities of the consolidated entity during the financial year were: petroleum exploration, the production, treatment and marketingof natural gas, crude oil, condensate, naphtha and liquid petroleum gas, and the transportation by pipeline of crude oil. No significant change inthe nature of these activities has occurred during the year.

3. REVIEW AND RESULTS OF OPERATIONSA detailed review of the operations and of the results of those operations of the consolidated entity during the financial year is contained on pages2 to 9 of this Annual Report. Further details regarding the results and operations appear in the individual reports at pages 12 to 33 inclusive.

In summary, the consolidated net profit after income tax attributable to the shareholders was $762.1 million, a 115% increase from the previousperiod comparative result of $354.7 million. Sales revenue was a record $2,463 million, up 64% from 2004.

In particular, revenues for the Australian segment was $2,303.5 million, a 64.5% increase from the 2004 result of $1,400.5 million. Internationaloperations recorded revenue growth of 50.2% from 2004 to $172.3 million in 2005.

Total production was up by 19% to 56.0 million barrels of oil equivalent (mmboe), reflecting the start-up of several new projects as detailed inSection 4 below.

4. SIGNIFICANT CHANGES IN THE STATE OF AFFAIRSThe Directors consider that matters or circumstances that have significantly affected, or may significantly affect, the operations, results ofoperations or the state of affairs of the Company in subsequent financial years are:

• The acquisition of Tipperary Corporation for a total consideration of approximately US$466 million (A$612 million), which delivers anapproximate 72% net revenue interest in the Fairview coal seam gas field located north of Roma in Queensland together with over 4,000square kilometres of exploration acreage in the Bowen Basin;

• The acquisition of Basin Oil Pty Ltd for $89.6 million, which holds all of OMV Petroleum Pty Ltd’s Gippsland Basin and Cooper Basin assets;

• The commencement of oil production from the Mutineer-Exeter fields in the Carnarvon Basin offshore Western Australia during March 2005;

• The commencement of gas production from the John Brookes field in the Carnarvon Basin offshore Western Australia during September 2005;

• The award of a production licence by the Victorian Government for the Casino development in the Otway Basin offshore Victoria;

• The development approval for the Oyong oil and gas field in Offshore East Java, Indonesia, which is Santos’ first operated oil and gasdevelopment in Indonesia;

• The signing of an agreement for the long term sale of gas from the Maleo field in East Java, Indonesia;

• The discovery of a major new gas field offshore Northern Territory with the Caldita 1 exploration well, and subsequent award of an adjoiningpermit which contains the previously discovered Lynedoch gas resource;

• The adoption of the Australian equivalents of International Financial Reporting Standards (AIFRS) and the “Successful Efforts” methodologyfor accounting for exploration and evaluation expenditure during the 2005 financial year, which will impact on the accounting for impairmentof assets, taxation, restoration and exploration and evaluation expenditure and accounting and disclosure of financial instruments. Theseaccounting policy changes will not impact in any way on Santos’ business strategy, operations, cash flow, credit ratings or capacity to payfully franked dividends.

5. DIVIDENDSOn 23 February 2006, Directors declared:

(i) that a fully franked final dividend of $0.20 per fully paid ordinary share be paid on 31 March 2006 to shareholders registered in the books ofthe Company at the close of business on 6 March 2006. This final dividend amounts to approximately $118.9 million; and

(ii) that in accordance with the Terms of Issue, a fully franked dividend of $2.5300 per Franked Unsecured Equity Listed Securities be paid on 31March 2006 to holders registered in the books of the Company at the close of business on 6 March 2006, amounting to $15.2 million.

A fully franked final dividend of $105.8 million (18 cents per share) was paid on 31 March 2005 on the 2004 results. Indication of this dividendpayment was disclosed in the 2004 Annual Report. In addition, a fully franked interim dividend of $106.6 million (18 cents per fully paidordinary share) was paid to members on 30 September 2005.

In accordance with the Terms of Issue, a fully franked final dividend of $2.4497 per Franked Unsecured Equity Listed Securities (amounting to$14.7 million) was paid on 31 March 2005 and a fully franked interim dividend of $2.6538 per Franked Unsecured Equity Listed Securities(amounting to $15.9 million) was paid on 30 September 2005.



6. ENVIRONMENTAL REGULATIONThe consolidated entity’s Australian operations are subject to various environmental regulations under Commonwealth, State and Territorylegislation, including under applicable petroleum legislation and in respect to its South Australian operations, licences (numbers EPA 888, 1259,2164, 2569, 14145 and 14427) issued under the Environment Protection Act 1993, its Queensland operations, licences (numbers 150029,150351,150276, 150286, 150287, 150288, 150329, 150330, 150331, 150332, 150333, 150334, 150347, 170543 and 170544) issued under theEnvironmental Protection Act 1994, and its Victorian operations, licence (54626) issued under the Environment Protection Act 1970. Applicablelegislation and requisite environmental licences are specified in the entity’s EHS Compliance Database, which forms part of the consolidatedentity’s overall Environmental Management System. Compliance performance is monitored on a regular basis and in various forms, includingenvironmental audits conducted by regulatory authorities and by the Company, either through internal or external resources. During the financialyear, except as mentioned below, no fines were imposed, no prosecutions were instituted and no notice of non-compliance with the abovereferenced regulations was received from a regulatory body.

Since the end of the financial year, the Company has received a formal warning from the Queensland Department of Natural Resources and Minesin relation to a delay by the Company in reporting as required under the Aboriginal Cultural Heritage Act 2003 (Qld) the existence and locationof a culturally significant Aboriginal burial site at Okotoko Waterhole in the Cooper Creek Basin in South West Queensland. The Department hasconfirmed that it has decided not to prosecute the Company in this instance.

7. EVENTS SUBSEQUENT TO BALANCE DATEExcept as mentioned below, in the opinion of the Directors there has not arisen in the interval between the end of the financial year and thedate of this report any matter or circumstance that has significantly affected or may significantly affect the operations of the consolidatedentity, the results of those operations, or the state of affairs of the consolidated entity in future financial years.

Dividends declared after 31 December 2005 are set out in Item 5 of this Directors’ Report and Note 22 to the financial statements.

8. LIKELY DEVELOPMENTSCertain likely developments in the operations of the consolidated entity and the expected results of those operations in future financial years are referred to at pages 3 to 9 of this Annual Report. Further details regarding likely developments appear in the individual reports at pages 14to 27 inclusive.

Further information about likely developments in the operations of the consolidated entity and the expected results of those operations in futurefinancial years has not been included in this report because disclosure of the information would be likely to result in unreasonable prejudice tothe consolidated entity.

9. DIRECTORS’ AND SENIOR EXECUTIVES’ REMUNERATIONThe remuneration policies and practices of the Company, (including the compensation arrangements for executive Directors and seniormanagement), the Company’s superannuation arrangements, the fees for non-executive members of the Board (within the aggregate amountapproved by shareholders), the Company’s employee share and option plans and executive and senior management performance review andsuccession planning are matters referred to and considered by the Remuneration Committee of the Board, which has access to independent adviceand comparative studies on the appropriateness of remuneration arrangements. Details of the Company’s remuneration policies and the natureand amount of the remuneration of the Directors and Specified Executives are set out in the Remuneration Report commencing on page 40 of this Annual Report. The Company claims the relief afforded to it under Australian Securities and Investment Commission Class Order 06/105 andreports that differences between values attributed to measurement under AASB 124 in the tables contained in note 28 and under section 6 ofAASB 1046 are that: (i) options issued prior to, or on, 7 November 2002 have not been valued; (ii) for defined benefit superannuation thebenefit is measured as current service cost under AASB 124 compared to contribution amounts under AASB 1046; and (iii) the value of forfeitedshares and options is credited against remuneration expenses under AASB 124.

10. INDEMNIFICATIONArticle 177 of the Company’s Constitution provides that the Company indemnifies each person who is or who has been an “officer” (as defined inthe Corporations Act 2001 (Corporations Act)) of the Company against any liability to another person (other than the Company or a related bodycorporate) arising from their position as such officer, unless the liability arises out of conduct involving a lack of good faith. The Company hasinsured against amounts which it is liable to pay pursuant to Article 177 or which it otherwise agrees to pay by way of indemnity. Article 177also provides for an indemnity in favour of an officer or auditor (KPMG) in relation to costs incurred in defending proceedings in whichjudgement is given in their favour, or in which they are acquitted or the Court grants relief.



In conformity with Article 177, the Company is party to Deeds of Indemnity in favour of each of the Directors referred to in this report who heldoffice during the year and certain executives of the consolidated entity, being indemnities to the full extent permitted by law. There is nomonetary limit to the extent of the indemnity under those Deeds and no liability has arisen thereunder during or since the financial year.

During the year, the Company paid premiums in respect of Directors’ and Officers’ Liability and Legal Expenses insurance contracts for the yearending 31 December 2005 and since the end of the year the Company has paid, or agreed to pay, premiums in respect of such contracts for theyear ending 31 December 2006. The insurance contracts insure against certain liability (subject to exclusions) persons who are or have beendirectors or officers of the Company and controlled entities. A condition of the contracts is that the nature of the liability indemnified and thepremium payable not be disclosed.

11. OTHER SERVICES PROVIDED BY THE AUDITORDuring the year the Company’s auditor, KPMG, was paid the following amounts in relation to non-audit services provided by KPMG:

Other Assurance services: $12,000

The Directors are satisfied, based on the advice of the audit committee, that the provision of the non-audit services detailed above by KPMG iscompatible with the general standard of independence for auditors imposed by the Corporations Act.

The reasons for forming this opinion are:

• all non-audit services have been reviewed by the audit committee to ensure they do not impact the impartiality and objectivity of theauditor; and

• the non-audit services provided do not undermine the general principle relating to auditor independence as set out in Professional StatementF1 Professional Independence.

A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 135 of thisAnnual Report.

12. SHARES UNDER OPTIONUnissued ordinary shares of Santos Ltd under option at the date of this report are as follows:

Date options granted Expiry date Issue price of shares Number under option

19 October 2001 18 October 2006 $6.52 500,00018 June 2002 17 June 2007 $6.20 250,00012 December 2003 22 December 2007 $6.38 72,18012 December 2003 22 December 2008 $6.38 100,00015 June 2004 14 June 2009 $6.95 200,00015 June 2004 1 July 2008 $6.95 130,14822 May 2005 22 May 2015 $8.46 1,166,000

2,418,328

Options do not confer an entitlement to participate in a bonus or rights issue, prior to the exercise of the option.



13. SHARES ISSUED ON THE EXERCISE OF OPTIONSThe following ordinary shares of Santos Ltd were issued during the year ended 31 December 2005 on the exercise of options granted under theSantos Executive Share Option Plan. No further shares have been issued since that date on the exercise of options granted under the SantosExecutive Share Option Plan. No amounts are unpaid on any of the shares.

Date options granted Issue price of shares Number of shares issued

18 April 2000 $3.92 50,00026 August 2000 $5.83 3,000,0006 June 2001 $6.69 550,00019 October 2001 $6.52 225,00018 June 2002 $6.20 300,00012 December 2003 $6.38 136,134

4,261,134

14. ROUNDINGAustralian Securities and Investments Commission Class Order 98/100 (as in force on 30 June 2005), applies to the Company and accordinglyamounts have been rounded off in accordance with that Class Order, unless otherwise indicated.

This report is made on 23 February 2006 in accordance with a resolution of the Directors.

Director Director23 February 2006


68

INCOME STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2005

Consolidated Santos Ltd2005 2004 2005 2004

Note $million $million $million $million

Product sales 2 2,462.8 1,500.9 721.2 568.8Cost of sales 3 (1,220.2) (974.2) (412.8) (405.2)

Gross profit 1,242.6 526.7 308.4 163.6Other revenue 2 13.1 14.3 19.9 270.4Other income 2 104.7 189.0 42.7 416.0Other expenses 3 (155.6) (163.6) 306.7 (67.7)

Operating profit before net financing costs 1,204.8 566.4 677.7 782.3Financial income 5 8.6 3.5 52.1 45.1Financial expenses 5 (79.9) (51.1) (108.9) (97.8)

Net financing costs (71.3) (47.6) (56.8) (52.7)

Profit before tax 1,133.5 518.8 620.9 729.6Income tax expense 6 (371.4) (164.1) (102.2) (74.2)

Net profit after income tax attributable to equity holders of Santos Ltd 762.1 354.7 518.7 655.4

Earnings per share (¢)Basic 23 124.4 54.2

Diluted 23 117.7 54.2

Dividends per share ($)Ordinary shares 22 0.36 0.30

Redeemable preference shares 22 5.1035 5.00

Reset preference shares 22 – 6.5880

The income statements are to be read in conjunction with the notes to the consolidated financial statements.

Annual Report 2005

SAN171 WWW Financials 28/3/06 3:02 PM Page 68


BALANCE SHEETSAS AT 31 DECEMBER 2005



Current assetsCash and cash equivalents 7 229.2 126.1 65.5 39.3Trade and other receivables 8 511.7 420.8 1,376.2 1,656.3Inventories 9 144.0 117.5 67.3 58.8Other 10 27.2 3.2 – 2.3

Total current assets 912.1 667.6 1,509.0 1,756.7

Non-current assetsExploration and evaluation assets 11 339.1 272.0 17.7 15.0Oil and gas assets 12 4,792.5 3,736.4 1,727.4 1,138.2Other land, buildings, plant and equipment 13 73.5 66.9 52.4 42.0Other investments 15 14.8 1.2 2,995.3 2,071.6Deferred tax assets 16 57.4 89.6 – –Other 10 1.9 2.9 – –

Total non-current assets 5,279.2 4,169.0 4,792.8 3,266.8

Total assets 6,191.3 4,836.6 6,301.8 5,023.5

Current liabilitiesTrade and other payables 17 392.2 372.9 379.6 451.9Deferred income 4.9 5.8 1.1 1.5Interest-bearing loans and borrowings 18 11.1 49.9 2,450.9 1,686.2Current tax liabilities 184.7 11.7 176.6 9.9Employee benefits 19 49.7 45.3 48.2 44.4Provisions 20 22.7 16.2 6.6 1.1Other 21 1.8 14.6 1.3 –

Total current liabilities 667.1 516.4 3,064.3 2,195.0

Non-current liabilitiesDeferred income 13.8 16.3 – –Interest-bearing loans and borrowings 18 1,817.0 1,209.5 – –Deferred tax liabilities 16 512.9 521.8 165.6 133.3Employee benefits 19 11.3 12.5 11.3 12.5Provisions 20 198.9 168.5 59.7 34.4Other 21 6.3 33.8 – –

Total non-current liabilities 2,560.2 1,962.4 236.6 180.2

Total liabilities 3,227.3 2,478.8 3,300.9 2,375.2

Net assets 2,964.0 2,357.8 3,000.9 2,648.3

EquityIssued capital 22 2,212.1 2,141.7 2,212.1 2,141.7Reserves 22 (178.3) (195.3) 4.4 –Retained profits 22 930.2 411.4 784.4 506.6

Total equity attributable to equity holders of Santos Ltd 2,964.0 2,357.8 3,000.9 2,648.3

The balance sheets are to be read in conjunction with the notes to the consolidated financial statements.



CASH FLOW STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2005



Cash flows from operating activitiesReceipts from customers 2,474.7 1,544.3 729.9 644.4Dividends received 0.1 – 0.1 251.7Interest received 8.6 3.5 52.1 45.1Overriding royalties received 12.8 14.5 19.7 19.0Insurance proceeds received 55.9 – 35.8 –Pipeline tariffs and other receipts 53.8 19.9 16.8 18.0Payments to suppliers and employees (696.3) (583.6) (259.5) (279.0)Royalty, excise and PRRT payments (209.3) (169.6) (110.8) (78.4)Borrowing costs paid (86.3) (65.2) (99.9) (90.6)Income taxes paid (156.1) (158.8) (113.8) (137.5)

Net cash provided by operating activities 27 1,457.9 605.0 270.4 392.7

Cash flows from investing activitiesPayments for:

Exploration and evaluation expenditure (187.3) (126.0) (91.3) (65.7)Oil and gas assets expenditure (843.8) (664.4) (228.1) (249.7)Other land, buildings, plant and equipment (23.2) (8.5) (24.6) (8.5)Acquisitions of oil and gas assets (9.3) (14.5) (451.9) –Acquisitions of controlled entities (556.1) (112.3) (108.1) (93.6)Acquisitions of other investments (5.0) – (5.0) –Restoration expenditure (9.7) (7.3) (0.3) (0.1)Share subscriptions in controlled entities – – (426.5) (151.7)

Other investing activities 3.1 (0.5) 0.7 (0.5)Proceeds from disposal of non-current assets 80.7 39.9 32.3 430.0Proceeds from disposal of other investments 29.0 – 29.0 –

Net cash used in investing activities (1,521.6) (893.6) (1,273.8) (139.8)

Cash flows from financing activitiesDividends paid (200.2) (212.8) (200.2) (212.8)Proceeds from issues of ordinary shares 27.6 6.4 27.6 6.4Proceeds from issue of redeemable convertible preference shares – 589.5 – 589.5Redemption of reset convertible preference shares – (350.0) – (350.0)Net drawdowns/(repayments) of borrowings 343.3 282.8 (1.0) –Net receipts from/(payments to) controlled entities – – 1,204.7 (297.0)Premium paid on buy-back of reset convertible preference shares – (2.4) – (2.4)Other financing activities 0.5 0.4 – –

Net cash provided by/(used in) financing activities 171.2 313.9 1,031.1 (266.3)

Net increase/(decrease) in cash 107.5 25.3 27.7 (13.4)Cash and cash equivalents at the beginning of the year 126.1 111.1 39.3 52.9Effects of exchange rate changes on the balances of cash held in

foreign currencies (4.4) (10.3) (1.5) (0.2)

Cash and cash equivalents at the end of the year 7 229.2 126.1 65.5 39.3

The cash flow statements are to be read in conjunction with the notes to the consolidated financial statements.



STATEMENTS OF RECOGNISED INCOME AND EXPENSEFOR THE YEAR ENDED 31 DECEMBER 2005



Adjustment on initial adoption of AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139 “Financial Instruments: Recognition and Measurement”, net of tax, to:

Retained profits 37 (2.4) – – –Reserves 37 (6.7) – (7.9) –

Change in fair value of equity securities available-for-sale, net of tax 4.9 – 4.5 –Foreign exchange translation differences 57.1 (52.7) – –Net gain/(loss) on hedge of net investment in foreign subsidiaries (46.1) 12.1 – –Cash flow hedges:

Gains taken to equity 7.8 – 7.8 –Share-based payment transactions 2.4 0.1 2.4 0.1Actuarial (loss)/gain on defined benefit plan, net of tax 19 (0.3) 3.3 (0.3) 3.3

Net income/(expense) recognised directly in equity 16.7 (37.2) 6.5 3.4Profit for the period 762.1 354.7 518.7 655.4

Total recognised income and expense for the period attributable to equity holders of Santos Ltd 22 778.8 317.5 525.2 658.8

Other movements in equity arising from transactions with owners as owners are set out in note 22.

The statements of recognised income and expense are to be read in conjunction with the notes to the consolidated financial statements.


72

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEAR ENDED 31 DECEMBER 2005

1. Significant Accounting Policies

Santos Ltd (“the Company”) is a companydomiciled in Australia. The consolidatedfinancial report of the Company for the yearended 31 December 2005 comprises theCompany and its controlled entities (“theconsolidated entity”).

The financial report was authorised for issueby the Directors on 23 February 2006.

(a) Statement of complianceThe financial report is a general purposefinancial report which has been preparedin accordance with Australian AccountingStandards, Urgent Issues GroupInterpretations adopted by the AustralianAccounting Standards Board (“AASB”)and the Corporations Act 2001.International Financial ReportingStandards (“IFRSs”) form the basis ofAustralian Accounting Standards adoptedby the AASB, being Australianequivalents to IFRSs (“AIFRSs”).

This is the consolidated entity’s firstfinancial report prepared in accordancewith AIFRS and AASB 1 “First-timeAdoption of Australian Equivalents toInternational Financial ReportingStandards” has been applied. Anexplanation of how the transition toAIFRS has affected the reported financialposition, financial performance and cashflows of the consolidated entity and theCompany is provided in note 36.

(b) Basis of preparationThe financial report is presented inAustralian dollars.

The financial report is prepared on thehistorical cost basis except thatderivative financial instruments andfinancial instruments classified asavailable-for-sale are stated at theirfair value.

The Company is of a kind referred to inASIC Class Order 98/100 dated 10 July1998 (updated by Class Order 05/641effective 28 July 2005) and in accordancewith that Class Order, amounts in thefinancial report and Directors’ Reporthave been rounded off to the nearesthundred thousand dollars, unlessotherwise stated.

The preparation of a financial report inconformity with Australian AccountingStandards requires management to makejudgements, estimates and assumptions

that affect the application of policiesand reported amounts of assets andliabilities, income and expenses. Theestimates and associated assumptionsare based on historical experience andvarious other factors that are believed tobe reasonable under the circumstances,the results of which form the basis ofmaking the judgements about carryingvalues of assets and liabilities that arenot readily apparent from other sources.Actual results may differ from theseestimates. These accounting policies havebeen consistently applied by each entityin the consolidated entity.

The estimated quantities of proven andprobable hydrocarbon reserves reportedby the Company are integral to thecalculation of depletion and depreciationexpense and to assessments of possibleimpairment of assets. Estimated reservequantities are based upon interpretationsof geological and geophysical models andassessments of the technical feasibilityand commercial viability of producing thereserves. These assessments requireassumptions to be made regarding futuredevelopment and production costs,commodity prices, exchange rates andfiscal regimes. Reserves estimates areprepared in accordance with theCompany’s policies and procedures forreserves estimation which conform toguidelines prepared by the Society ofPetroleum Engineers.

The estimates and underlyingassumptions are reviewed on an ongoingbasis. Revisions to accounting estimatesare recognised in the period in which theestimate is revised if the revision affectsonly that period or in the period of therevision and future periods if the revisionaffects both current and future periods.

The consolidated entity has elected toearly adopt revised accounting standardAASB 119 “Employee Benefits” andAASB 2004-3 “Amendments to AustralianAccounting Standards” in these financialstatements. All other recently issuedor amended Australian AccountingStandards which are not yet effectivehave not been early adopted for the yearended 31 December 2005, and they arenot expected to result in significantaccounting policy or disclosure changes.

Except for the change in accountingpolicy relating to classification andmeasurement of financial instruments(refer note 37), the accounting policiesset out below have been appliedconsistently to all periods presented inthe consolidated financial report, and inpreparing an opening AIFRS balancesheet at 1 January 2004 for the purposeof transition to Australian AccountingStandards – AIFRS. The policies applied tofinancial instruments for 2004 and 2005are disclosed in notes 1(e), 1(k) and 1(r).

The accounting policies have beenconsistently applied by the consolidatedentity.

(c) Basis of consolidationSubsidiariesSubsidiaries are entities controlled bythe Company. Control exists when theCompany has the power, directly orindirectly, to govern the financial andoperating policies of an entity so as toobtain benefits from its activities. Inassessing control, potential votingrights that presently are exercisable orconvertible are taken into account. Thefinancial statements of subsidiaries areincluded in the consolidated financialstatements from the date that controlcommences until the date that controlceases. On acquisition, the assets,liabilities and contingent liabilities ofa subsidiary are measured at their fairvalue at the date of acquisition.

Investments in subsidiaries are carried attheir cost of acquisition in the Company’sfinancial statements.

Intragroup balances and any unrealisedgains and losses or income and expensesarising from intragroup transactions areeliminated in preparing the consolidatedfinancial statements.

Jointly controlled operationsThe interests of the Company and of theconsolidated entity in unincorporatedjoint ventures are brought to account byrecognising in its financial statementsthe assets it controls, the expenses andliabilities it incurs, and the income fromthe sale or use of its share of theproduction of the joint venture.

Annual Report 2005



1. Significant Accounting Policies(continued)

(d) Foreign currencyForeign currency transactionsTransactions in foreign currencies aretranslated at the foreign exchange rateruling at the date of the transaction.Monetary assets and liabilitiesdenominated in foreign currencies at thebalance sheet date are translated to thefunctional currency at the foreignexchange rate ruling at that date.Foreign exchange differences arising ontranslation are recognised in the incomestatement.

Foreign exchange differences that ariseon the translation of monetary items thatform part of the net investment in aforeign operation are recognised inequity in the consolidated financialstatements.

Non-monetary assets and liabilities thatare measured in terms of historical costin a foreign currency are translated usingthe exchange rate at the date of thetransaction. Non-monetary assets andliabilities denominated in foreigncurrencies that are stated at fair value aretranslated to the functional currency atforeign exchange rates ruling at the datesthe fair value was determined.

Financial statements of foreignoperationsThe assets and liabilities of foreignoperations, including fair valueadjustments arising on consolidation, aretranslated to Australian dollars at foreignexchange rates ruling at the balancesheet date. The revenues and expenses offoreign operations are translated toAustralian dollars at rates approximatingthe foreign exchange rates ruling atthe dates of the transactions. Foreignexchange differences arising onretranslation are recognised directly inthe foreign currency translation reserve.

Net investment in foreign operationsExchange differences arising from thetranslation of the net investment inforeign operations and of related hedgesare taken to the foreign currencytranslation reserve. They are releasedinto the income statement upon disposalof the foreign operation.

(e) Derivative financial instrumentsCurrent accounting policyThe consolidated entity uses derivativefinancial instruments to hedge itsexposure to changes in foreign exchangerates, commodity prices and interestrates arising in the normal course ofbusiness. The principal derivatives usedare forward foreign exchange contracts,foreign currency swaps, interest rateswaps, commodity crude oil price swapand option contracts, and natural gasprice swap and option contracts. Theiruse is subject to a comprehensive set ofpolicies, procedures and limits approvedby the Board of Directors. Theconsolidated entity does not trade inderivative financial instruments forspeculative purposes.

Derivative financial instruments arerecognised initially at cost. Subsequentto initial recognition, derivative financialinstruments are stated at fair value.Where derivatives qualify for hedgeaccounting, recognition of any resultantgain or loss depends on the nature of theitem being hedged, otherwise the gain orloss on re-measurement to fair value isrecognised immediately in profit or loss.

The fair value of interest rate swaps is theestimated amount that the consolidatedentity would receive or pay to terminatethe swap at the balance sheet date,taking into account current interest ratesand the current creditworthiness of theswap counterparties. The fair value offorward exchange contracts is theirquoted market price at the balance sheetdate, being the present value of thequoted forward price. The fair value ofcommodity swap and option contracts istheir quoted market price at the balancesheet date.

Comparative accounting policyThe consolidated entity uses derivativefinancial instruments to hedge itsexposure to changes in foreign exchangerates, commodity prices and interestrates arising in the normal course ofbusiness. The principal derivatives usedare forward foreign exchange contracts,foreign currency swaps, foreign currencyoption contracts, interest rate swaps andoptions, commodity crude oil price swap

and option contracts and natural gasswap and option contracts. Their use issubject to a comprehensive set ofpolicies, procedures and limits approvedby the Board of Directors. Theconsolidated entity does not trade inderivative financial instruments forspeculative purposes.

The quantitative effect of the change inaccounting policy is set out in note 37.

(f) HedgingCurrent accounting policyFair value hedgeWhere a derivative financial instrumenthedges the changes in fair value of arecognised asset or liability or anunrecognised firm commitment (or anidentified portion of such asset, liabilityor firm commitment), any gain or loss onthe hedging instrument is recognised inthe income statement. The hedged item isstated at fair value in respect of the riskbeing hedged, with any gain or loss beingrecognised in the income statement.

Cash flow hedgeWhere a derivative financial instrument isdesignated as a hedge of the variabilityin cash flows of a recognised asset orliability, or a highly probable forecasttransaction, the effective part of anygain or loss on the derivative financialinstrument is recognised directly inequity. When the forecast transactionsubsequently results in the recognition ofa non-financial asset or non-financialliability, or the forecast transaction for anon-financial asset or non-financialliability becomes a firm commitment forwhich fair value hedging is applied, theassociated cumulative gain or loss isremoved from equity and included in theinitial cost or other carrying amount ofthe non-financial asset or liability. If ahedge of a forecast transactionsubsequently results in the recognition ofa financial asset or a financial liability,the associated gains and losses that wererecognised directly in equity arereclassified into profit or loss in the sameperiod or periods during which the assetacquired or liability assumed affectsprofit or loss (i.e. when interest incomeor expense is recognised).


74



For cash flow hedges, other than thosecovered by the preceding two policystatements, the associated cumulativegain or loss is removed from equity andrecognised in the income statement inthe same period or periods during whichthe hedged forecast transaction affectsprofit or loss. The ineffective part of anygain or loss is recognised immediately inthe income statement.

When a hedging instrument expires oris sold, terminated or exercised, or theentity revokes designation of the hedgerelationship, but the hedged forecasttransaction is still expected to occur, thecumulative gain or loss at that pointremains in equity and is recognised inaccordance with the above policy whenthe transaction occurs. If the hedgedtransaction is no longer expected to takeplace, the cumulative unrealised gain orloss recognised in equity is recognisedimmediately in the income statement.

Hedge of monetary assets and liabilitiesWhen a derivative financial instrument isused to hedge economically the foreignexchange exposure of a recognisedmonetary asset or liability, hedgeaccounting is not applied and any gainor loss on the hedging instrument isrecognised in the income statement.

Hedge of net investment in a foreignoperationThe portion of the gain or loss on aninstrument used to hedge a netinvestment in a foreign operation thatis determined to be an effective hedgeis recognised directly in equity. Anyineffective portion is recognisedimmediately in the income statement.

Comparative accounting policyCash flow hedgeGains and losses on derivative financialinstruments designated as hedges areaccounted for on the same basis as theunderlying exposures they are hedging.

The gains and losses on derivativefinancial instruments hedging specificpurchase or sale commitments aredeferred and included in themeasurement of the purchase or sale.

Where hedge transactions are designatedas a hedge of an anticipated specificpurchase or sale, the gains or losses on

the hedge arising up to the date of theanticipated transaction, together withany costs or gains arising at the time ofentering into the hedge, are deferred andincluded in the measurement of theanticipated transaction when thetransaction has occurred as designated.Any gains or losses on the hedgetransaction after that date are includedin the income statements. The netamounts receivable or payable underforward foreign exchange contracts andthe associated deferred gains or lossesare recorded on the balance sheets fromthe inception of the hedge transaction.

Hedge of net investment in a foreignoperationExchange differences relating to amountspayable in foreign currencies designatedas a hedge of a self-sustaining foreignoperation, together with any relatedincome tax expense/benefit, aretransferred on consolidation to theforeign currency translation reserve.

(g) Acquisition of assetsAll assets acquired are recorded at theircost of acquisition, being the amount ofcash or cash equivalents paid and the fairvalue of any other consideration given.The cost of an asset comprises thepurchase price including any incidentalcosts directly attributable to theacquisition; any costs directlyattributable to bringing the asset to thelocation and condition necessary for it tobe capable of operating; and the estimateof the costs of dismantling and removingthe asset and restoring the site on whichit is located determined in accordancewith note 1(p).

Business combinationsAll business combinations are accountedfor by applying the purchase method.

The classification and accountingtreatment of business combinations thatoccurred prior to 1 January 2004 havenot been reconsidered in preparing theconsolidated entity’s opening AIFRSbalance sheet at 1 January 2004.

(h) Exploration and evaluation expenditureExploration and evaluation expenditurein respect of each area of interest isaccounted for using the successful effortsmethod of accounting. The successful

efforts method requires all explorationand evaluation expenditure to beexpensed in the period it is incurred,except the costs of successful wells andthe costs of acquiring interests in newexploration assets, which are capitalisedas intangible exploration and evaluation.The costs of wells are initially capitalisedpending the results of the well.

An area of interest refers to an individualgeological area where the presence of oilor a natural gas field is consideredfavourable or has been proved to exist,and in most cases will comprise anindividual oil or gas field.

Exploration and evaluation expenditureis recognised in relation to an area ofinterest when the rights to tenure of thearea of interest are current and either:

(i) such expenditure is expected to berecovered through successfuldevelopment and commercialexploitation of the area of interest;or

(ii) the exploration activities in the areaof interest have not yet reached astage which permits reasonableassessment of the existence ofeconomically recoverable reservesand active and significant operationsin, or in relation to, the area ofinterest are continuing.

When an oil or gas field enters thedevelopment phase the accumulatedexploration and evaluation expenditure istransferred to oil and gas assets – assetsin development.

(i) Oil and gas assetsAssets in developmentWhen the technical and commercialfeasibility of an undeveloped oil or gasfield has been demonstrated the fieldenters its development phase. The costsof oil and gas assets in the developmentphase are separately accounted for astangible assets and include pastexploration and evaluation costs, development drilling and othersubsurface expenditure, surface plantand equipment and any associated landand buildings.

When commercial operation commencesthe accumulated costs are transferred tooil and gas assets – producing assets.

Annual Report 2005




Producing assetsThe costs of oil and gas assets inproduction are separately accountedfor as tangible assets and include pastexploration and evaluation costs,pre-production development costs andthe ongoing costs of continuing todevelop reserves for production and toexpand or replace plant and equipmentand any associated land and buildings.

These costs are subject to depreciationand depletion in accordance with thefollowing policy.

(j) Depreciation and depletionDepreciation charges are calculated towrite-off the depreciable value ofbuildings, plant and equipment over theirestimated economic useful lives to theentity. Each component of an item ofbuildings, plant and equipment with acost that is significant in relation to thetotal cost of the asset is depreciatedseparately. The residual value, useful lifeand depreciation method applied to anasset is reviewed at the end of eachannual reporting period.

Depreciation of onshore buildings, plantand equipment and corporate assets iscalculated using the straight line methodof depreciation on an individual assetbasis from the date the asset is availablefor use.

The estimated useful lives for each classof onshore assets for the current andcomparative periods are as follows:

• Plant and equipment– Computer equipment 3 – 5 years– Motor vehicles 4 – 7 years– Furniture and fittings 10 – 20 years– Pipelines 10 – 30 years– Plant and facilities 10 – 50 years

• Buildings 20 – 50 years

Depreciation of offshore plant andequipment is calculated using the unit ofproduction method on a cash generatingunit basis (refer note 1(o)) from the dateof commencement of production.

Depletion charges are calculated usinga unit of production method based onheating value which will amortise thecost of carried forward exploration,evaluation and subsurface developmentexpenditure (“Sub-surface assets”) overthe life of the estimated Proven plus

Probable (“2P”) reserves in a cashgenerating unit, together with futuresubsurface costs necessary to develop thehydrocarbon reserves in the respectivecash generating units.

The heating value measurement used forthe conversion of volumes of differenthydrocarbon products is barrels of oilequivalent.

Depletion is not charged on costscarried forward in respect of assetsin the development stage untilproduction commences.

(k) InvestmentsCurrent accounting policyFinancial instruments held by theconsolidated entity which are classifiedas being available-for-sale are stated atfair value, with any resultant gain or lossbeing recognised directly in equity.

The fair value of financial instrumentsclassified as available-for-sale is theirquoted bid price on the balance sheet date.

Financial instruments classifiedas available-for-sale arerecognised/derecognised by theconsolidated entity on the date itcommits to purchase/sell theinvestments. When these investmentsare derecognised, the cumulative gain orloss previously recognised directly inequity is recognised in profit or loss.

Comparative accounting policyInvestments in other listed entities aremeasured at the lower of cost andrecoverable amount. The quantitativeeffect of the change in accounting policyis set out in note 37.

(l) InventoriesInventories are stated at the lower of costand net realisable value. Net realisablevalue is the estimated selling price in theordinary course of business, less theestimated costs of completion and sellingexpenses. Cost is determined as follows:

(i) drilling and maintenance stocks,which include plant spares,consumables and maintenance anddrilling tools used for ongoingoperations, are valued at weightedaverage cost; and

(ii) petroleum products, which compriseextracted crude oil, liquefied

petroleum gas, condensate and naphthastored in tanks and pipeline systems andprocessed sales gas and ethane stored insub-surface reservoirs, are valued usingthe absorption cost method in a mannerwhich approximates specificidentification.

(m)Trade and other receivablesTrade and other receivables are stated attheir cost less impairment losses.

(n) Cash and cash equivalentsCash and cash equivalents comprises cashbalances and call deposits.

Bank overdrafts that are repayable ondemand and form an integral part of theconsolidated entity’s cash managementare included as a component of cash andcash equivalents for the purpose of thecash flows statement.

(o) ImpairmentThe carrying amounts of the consolidatedentity’s assets, other than inventoriesand deferred tax assets, are reviewed ateach balance sheet date to determinewhether there is any indication ofimpairment. Where an indicator ofimpairment exists a formal estimateof the recoverable amount is made.

Oil and gas assets, land, buildings,plant and equipment are assessed forimpairment on a cash generating unit(“CGU”) basis. A cash generating unit isthe smallest grouping of assets thatgenerates independent cash flows, andgenerally represents an individual oil orgas field. Impairment losses recognised inrespect of cash generating units areallocated to reduce the carrying amount ofthe assets in the unit on a pro-rata basis.

An impairment loss is recognised in theincome statement whenever the carryingamount of an asset or its cash generatingunit exceeds its recoverable amount.

Where a decline in the fair value of anavailable-for-sale financial asset hasbeen recognised directly in equity andthere is objective evidence that the assetis impaired, the cumulative loss that hadbeen recognised directly in equity isrecognised in profit or loss even thoughthe financial asset has not beenderecognised. The amount of thecumulative loss that is recognised inprofit or loss is the difference between


76



the acquisition cost and current fairvalue, less any impairment loss on thatfinancial asset previously recognised inprofit or loss.

Calculation of recoverable amountThe recoverable amount of an asset is thegreater of its fair value less costs to selland its value in use. In assessing value inuse, the estimated future cash flows arediscounted to their present value using apre-tax discount rate that reflects currentmarket assessments of the time value ofmoney and the risks specific to the asset.Where an asset does not generate cashflows that are largely independent fromother assets or groups of assets, therecoverable amount is determined forthe cash generating unit to which theasset belongs.

For oil and gas properties the estimatedfuture cash flows are based on estimatesof hydrocarbon reserves, futureproduction profiles, commodity prices,operating cost and any futuredevelopment costs necessary to producethe reserves. Estimates of futurecommodity prices are based on contractedprices where applicable or based onforward market prices where available.

Reversals of impairmentAn impairment loss is reversed if therehas been an increase in the estimatedrecoverable amount of a previouslyimpaired asset. An impairment loss isreversed only to the extent that theasset’s carrying amount does not exceedthe carrying amount that would havebeen determined, net of depreciationor depletion, if no impairment loss hadbeen recognised.

(p) ProvisionsA provision is recognised in the balancesheet when the consolidated entity has apresent legal or constructive obligationas a result of a past event, and it isprobable that an outflow of economicbenefits will be required to settle theobligation. Provisions are determined bydiscounting the expected future cashflows at a pre-tax rate that reflectscurrent market assessments of the truevalue of money and, where appropriate,the risks specific to the liability.

RestorationProvisions for future environmentalrestoration are recognised where thereis a present obligation as a result ofexploration, development, production,transportation or storage activitieshaving been undertaken, and it isprobable that an outflow of economicbenefits will be required to settle theobligation. The estimated futureobligations include the costs of removingfacilities, abandoning wells and restoringthe affected areas.

The provision for future restoration costsis the best estimate of the present valueof the expenditure required to settle therestoration obligation at the reportingdate, based on current legal requirementsand technology. Future restoration costsare reviewed annually and any changes inthe estimate are reflected in the presentvalue of the restoration provision at theend of the balance sheet date, with acorresponding change in the cost of theassociated asset.

The amount of the provision for futurerestoration costs relating to exploration,development and production facilities iscapitalised and depleted as a componentof the cost of those activities.

The unwinding of the effect ofdiscounting on the provision isrecognised as a finance cost.

(q) Employee benefitsWages, salaries and annual leaveLiabilities for employee benefits forwages, salaries and annual leaverepresent present obligations resultingfrom employees’ services provided toreporting date, are calculated atundiscounted amounts based onremuneration wage and salary ratesthat the consolidated entity expects topay as at reporting date includingrelated on-costs.

Long-term service benefitsLong service leave is provided in respectof all employees, based on the presentvalue of the estimated future cashoutflow to be made resulting fromemployees’ services up to balance date.The obligation is calculated using

expected future increases in wage and salary rates including related on-costs and expected settlement dates, and isdiscounted using the rates attached to theCommonwealth Government bonds at thebalance sheet date which have maturity datesapproximating the terms of the consolidatedentity’s obligations.

Defined contribution plansThe Company and several controlled entitiescontribute to a number of definedcontribution superannuation plans.Obligations for contributions are recognisedas an expense in the income statement asincurred.

Defined benefit planThe consolidated entity has early adopted therevised AASB 119 “Employee Benefits”.

The consolidated entity’s net obligation inrespect of the defined benefitsuperannuation plan is calculated byestimating the amount of future benefit thatemployees have earned in return for theirservice in the current and prior periods; thatbenefit is discounted to determine its presentvalue, and the fair value of any plan assets isdeducted.

The discount rate is the yield at the balancesheet date on government bonds that havematurity dates approximating the terms ofthe consolidated entity’s obligations. Thecalculation is performed by a qualifiedactuary using the projected unit creditmethod.

When the benefits of the plan are improved,the portion of the increased benefit relatingto past service by employees is recognised asan expense in the income statement on astraight line basis over the average perioduntil the benefits become vested. To theextent that the benefits vest immediately, theexpense is recognised immediately in theincome statement.

All actuarial gains and losses as at 1 January2004, the date of transition to AIFRS, wererecognised in retained earnings. Actuarialgains or losses that arise subsequent to 1January 2004 in calculating the consolidatedentity’s obligation in respect of the plan arerecognised directly in retained earnings.

When the calculation results in plan assetsexceeding liabilities to the consolidated

Annual Report 2005




entity, the recognised asset is limited tothe net total of any unrecognisedactuarial losses and past service costsand the present value of any futurerefunds from the plan or reductions infuture contributions to the plan.

Past service cost is the increase in thepresent value of the defined benefitobligation for employee services in priorperiods, resulting in the current periodfrom the introduction of, or changes to,post-employment benefits or otherlong-term employee benefits. Pastservice costs may either be positive(where benefits are introduced orimproved) or negative (where existingbenefits are reduced).

Share-based payment transactionsThe Santos Executive Share Option Planallows eligible executives to acquireshares in the capital of the Company.The fair value of options granted isrecognised as an employee expense witha corresponding increase in equity. Thefair value is measured at grant date andrecognised over the period during whichthe executive becomes unconditionallyentitled to the options. The fair valueof the options granted during 2005 ismeasured using the Monte CarloSimulation Method, which takes intoaccount the performance hurdles thatform part of the vesting conditions. Thefair value of the options granted during2004 is measured using a Black-Scholesoption pricing model, taking into accountthe terms and conditions upon which theoptions were granted. The amountrecognised as an expense is only adjustedwhen the options do not vest due tonon-market related conditions.

The fair value of Share Acquisition Rights(“SARs”) issued to eligible executivesunder the Executive Long-term IncentiveProgram is recognised as an employeeexpense with a corresponding increase inequity. The fair value is measured at grantdate and recognised over the periodduring which the executive becomesunconditionally entitled to the SARs.The fair value of the SARs granted ismeasured using the Monte CarloSimulation Method, which takes intoaccount the performance hurdles that

form part of the vesting conditions. Theamount recognised as an expense is only adjusted when the SARs do not vest dueto non-market related conditions.

The fair value of shares issued to eligibleemployees under the Santos EmployeeShare Acquisition Plan, and to eligibleexecutives and employees under theSantos Employee Share Purchase Plan,is recognised as an increase in issuedcapital on grant date.

(r) Interest-bearing borrowingsCurrent accounting policyInterest-bearing borrowings arerecognised initially at fair value, net oftransaction costs incurred. Subsequentto initial recognition, interest-bearingborrowings are stated at amortised costwith any difference between cost andredemption value being recognised in theincome statement over the period of theborrowings on an effective interest basis.

Fixed rate notes that are hedged by aninterest rate swap are recognised at fairvalue (refer note 1(f)).

Comparative accounting policyBorrowings are carried on the balancesheets at their principal amount. Interestis accrued at the contracted rate.

(s) Capitalisation of borrowing costsBorrowing costs, including preproductioninterest, finance charges and foreigncurrency gains and losses on the interestcosts of foreign currency borrowings,relating to major oil and gas assetsunder development up to the date ofcommencement of commercialoperations, are capitalised as acomponent of the cost of development.Where funds are borrowed specifically forqualifying projects the actual borrowingcosts incurred are capitalised. Where theprojects are funded through generalborrowings the borrowing costs arecapitalised based on the weightedaverage borrowing rate.

Borrowing costs incurred aftercommencement of commercial operationsare expensed.

(t) Deferred incomeA liability is recorded for obligationsunder sales contracts to deliver natural

gas in future periods for which paymenthas already been received.

(u) Share capitalPreference share capitalPreference share capital is classified asequity if it is non-redeemable and anydividends are discretionary, or it isredeemable only at the Company’soption. Dividends on preference sharecapital classified as equity are recognisedas distributions within equity.

DividendsDividends are recognised as a liability inthe period in which they are declared.

Transaction costsTransaction costs of an equity transactionare accounted for as a deduction fromequity, net of any related incometax benefit.

(v) RevenueProduct sales and overriding royalties arerecognised in the income statement whenthe significant risks and rewards ofownership have been transferred to thebuyer. Dividend revenue from controlledentities is recognised as the dividends aredeclared and from other parties as thedividends are received.

(w) Other incomeEquipment rentals, pipeline tariffs andother income are recognised in theincome statement when the significantrisks and rewards of ownership have beentransferred to the buyer or when theservice has been performed.

The gain or loss arising on disposal ofa non-current asset is included as otherincome at the date control of the assetpasses to the buyer. The gain or loss ondisposal is calculated as the differencebetween the carrying amount of the assetat the time of disposal and the netproceeds on disposal.

(x) ExpensesGovernment royalties and petroleumresource rent tax

Government royalties and petroleumresource rent tax (“PRRT”) are recognisedas an operating expense on an accrualsbasis when the related sales arerecognised or related production takesplace. The amount is recognised in


78



accordance with government legislativerequirements.

Some oil and gas industry participantsare of the view that PRRT is moreappropriately accounted for as an incometax by applying AASB 112 “Income Taxes”.The Company is of the view that there hasbeen no definitive guidance from any ofthe relevant accounting standards settingbodies and that there remains uncertaintyas to what constitutes an income tax.Accordingly, the Company will continue toaccount for PRRT under the accruals basisdescribed above until such time as thisuncertainty is resolved or a clear industrypractice develops.

Had PRRT been accounted for as anincome tax, a deferred tax asset of$95.3 million would be recognised ontransition to AIFRS at 1 January 2004with a corresponding increase in retainedearnings. At 31 December 2005 thebalance of the deferred tax asset wouldhave been $108.9 million (2004:$33.1 million). Profit before tax wouldhave increased by $52.5 million (2004:$34.6 million), the PRRT income taxbenefit in 2005 would have been$39.0 million (2004: $86.5 millionexpense), and profit after tax wouldhave increased by $75.8 million (2004:$62.3 million decrease).

Operating lease paymentsOperating lease payments, where thelessor effectively retains substantiallyall the risks and rewards incidental toownership of the leased items, arerecognised in the income statement ona straight line basis over the term ofthe lease.

Net financing costsNet financing costs comprise interestpayable on borrowings calculated usingthe effective interest rate method, theunwinding of the effect of discounting onprovisions, and interest receivable onfunds invested.

Interest income is recognised in theincome statement as it accrues, using theeffective interest method.

(y) Goods and services taxRevenues, expenses and assets arerecognised net of the amount of goodsand services tax (“GST”), except wherethe amount of GST incurred is notrecoverable from the Australian Tax Office(“ATO”). In these circumstances the GSTis recognised as part of the cost ofacquisition of the asset or as part ofthe expense.

Receivables and payables are stated withthe amount of GST included. The netamount of GST recoverable from, orpayable to, the ATO is included as a currentasset or liability in the balance sheet.

Cash flows are included in the cash flowstatement on a gross basis. The GSTcomponents of cash flows arising frominvesting and financing activities whichare recoverable from, or payable to, theATO are classified as operating cash flows.

(z) Income taxIncome tax on the profit or loss for theyear comprises current and deferred tax.Income tax is recognised in the incomestatement except to the extent that itrelates to items recognised directly inequity, in which case it is recognisedin equity.

Current tax is the amount of income taxpayable on the taxable profit or loss forthe year, using tax rates enacted orsubstantially enacted at the balancesheet date, and any adjustment to taxpayable in respect of previous years.

Deferred tax is determined using thebalance sheet approach, providing fortemporary differences between thecarrying amounts of assets and liabilitiesfor financial reporting purposes and theappropriate tax bases. The followingtemporary differences are not providedfor: the initial recognition of assets orliabilities that affect neither accountingnor taxable profit, and differencesrelating to investments in subsidiaries tothe extent it is probable that they will notreverse in the foreseeable future. Theamount of deferred tax provided is basedon the expected manner of realisation orsettlement of the carrying amount ofassets and liabilities, using tax ratesenacted or substantially enacted at thebalance sheet date.

A deferred tax asset is recognised onlyto the extent that it is probable thatfuture taxable profits will be availableagainst which the asset can be utilised.Deferred tax assets are reduced to theextent that it is no longer probable thatthe related tax benefit will be realised.The Company and all its wholly-ownedAustralian resident entities are part of atax-consolidated group under Australiantaxation law. Santos Ltd is the headentity in the tax-consolidated group.Current tax expense/income, deferred taxliabilities and deferred tax assets arisingfrom temporary differences of themembers of the tax-consolidated groupare allocated among the members of thetax-consolidated group using a“stand-alone taxpayer” approach inaccordance with UIG 1052 “TaxConsolidation Accounting” and arerecognised in the separate financialstatements of each entity. Current taxliabilities and assets and deferred taxassets arising from unused tax lossesand tax credits of the members of thetax-consolidated group are recognisedby the Company (as head entity in thetax-consolidated group).

The Company and the other entities inthe tax-consolidated group have enteredinto a tax funding agreement. Taxcontribution amounts payable under thetax funding agreement are recognised aspayable to or receivable by the Companyand each other member of the group.Where the tax contribution amountrecognised by each member of thetax-consolidated group for a particularperiod under the tax funding agreement isdifferent to the aggregate of the currenttax liability or asset and any deferred taxasset arising from unused tax losses andtax credits in respect of that periodassumed by the Company, the differenceis recognised as a contribution from(or distribution to) equity participants.

The Company and the other entities in thetax-consolidated group have also enteredinto a tax sharing agreement pursuant towhich the other entities may be requiredto contribute to the tax liabilities of theCompany in the event of default by theCompany or upon leaving the group.

Annual Report 2005




2. Revenue and Other Income $million $million $million $million

Product sales:Gas and ethane 825.7 680.1 333.4 294.6Crude oil 1,106.8 501.8 237.4 198.5Condensate and naphtha 345.9 228.5 84.8 44.2Liquefied petroleum gas 184.4 90.5 65.6 31.5

2,462.8 1,500.9 721.2 568.8

Other revenue:Overriding royalties 13.0 14.3 19.8 18.7Dividends from other entities 0.1 – 0.1 –Dividends from controlled entities – – – 251.7

13.1 14.3 19.9 270.4

Total revenue 2,475.9 1,515.2 741.1 839.2

Other income:Insurance recovery 33.9 116.6 23.7 73.8Equipment rentals, pipeline tariffs and other 15.6 11.2 (1.2) 5.4Sole-risk buy-back premium 15.8 – – –Net gain on sale of non-current assets 23.1 61.2 5.1 336.8Net gain on sale of controlled entities 16.3 – 15.1 –

104.7 189.0 42.7 416.0

3. Expenses

Cost of sales:Cash cost of production:

Production costs:Production expenses 330.1 270.1 95.0 99.8Production facilities operating leases 38.7 27.6 15.0 12.9

368.8 297.7 110.0 112.7

Other operating costs:Pipeline tariffs and tolls 33.7 32.6 9.2 7.4Royalty and excise 115.2 119.4 49.1 73.1PRRT 52.5 34.6 – –

201.4 186.6 58.3 80.5

Total cash cost of production 570.2 484.3 168.3 193.2Depreciation and depletion 559.0 471.6 187.8 201.0Third party gas purchases 100.9 14.9 66.9 12.2(Increase)/decrease in product stock (9.9) 3.4 (10.2) (1.2)

Total cost of sales 1,220.2 974.2 412.8 405.2


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3. Expenses (continued) $million $million $million $million

Other expenses:Selling, general and administrative expenses:

Operating expenses 78.1 53.1 48.6 46.2Depreciation 2.0 3.3 0.2 0.3

80.1 56.4 48.8 46.5Foreign exchange losses/(gains) 3.8 (2.6) – 0.1Hedge ineffectiveness (gains)/losses (1.2) – 1.9 –Exploration and evaluation expensed 204.2 117.4 31.5 46.0Net impairment reversal of oil and gas assets (refer note 14) (131.3) (7.6) (50.5) (34.4)Net impairment (reversal)/loss of investment in controlled entities – – (338.4) 9.5

155.6 163.6 (306.7) 67.7

Profit before tax includes the following items:Depreciation and depletion:

Depletion of exploration and development expenditure 330.4 308.5 104.6 114.7Depreciation of plant and equipment 228.1 164.4 82.1 85.6Depreciation of buildings 2.5 2.0 1.3 1.0

561.0 474.9 188.0 201.3Employee benefits expense 126.5 130.9 105.2 116.8Share-based payments expense 2.4 0.1 2.4 0.1Write-down of inventories 4.0 5.0 2.4 3.1Operating lease rentals 53.2 38.9 21.0 19.1

Included in expenses are the following items:Accelerated depreciation due to East Spar shut-in included in depreciation

and depletion 18.5 – – –Costs associated with Moomba liquids recovery plant fire included in

production expenses – 17.5 – 11.9Organisation restructure costs included in selling, general and

administrative expenses 5.2 21.6 5.2 21.6

23.7 39.1 5.2 33.5

4. Earnings

Earnings before interest, tax, depreciation, depletion, exploration and impairment (“EBITDAX”) is calculated as follows:

Profit before tax 1,133.5 518.8 620.9 729.6Add back:

Net financing costs 71.3 47.6 56.8 52.7

Earnings before interest and tax (“EBIT”) 1,204.8 566.4 677.7 782.3Add back:

Depreciation and depletion 561.0 474.9 188.0 201.3Exploration and evaluation expensed 204.2 117.4 31.5 46.0Net impairment reversal of oil and gas assets (131.3) (7.6) (50.5) (34.4)Net impairment (reversal)/loss of investment in controlled entities – – (338.4) 9.5

EBITDAX 1,838.7 1,151.1 508.3 1,004.7

Annual Report 2005




5. Net Financing Costs $million $million $million $million

Interest income:Controlled entities – – 48.9 42.8Other entities 8.6 3.5 3.2 2.3

Financial income 8.6 3.5 52.1 45.1

Interest expense:Controlled entities – – 99.5 90.7Other entities 89.7 65.7 0.5 0.4Less borrowing costs capitalised (28.0) (32.1) – –

61.7 33.6 100.0 91.1Unwind of the effect of discounting on provisions (refer note 1(p)) 14.5 14.0 5.2 3.2Interest expense on defined benefit obligation 3.7 3.5 3.7 3.5

Financial expenses 79.9 51.1 108.9 97.8

Net financing costs 71.3 47.6 56.8 52.7

6. Income Tax Expense

Recognised in the income statementCurrent tax expenseCurrent year 320.7 157.2 58.4 53.4Adjustments for prior years 5.5 (10.0) 14.2 19.6

326.2 147.2 72.6 73.0

Deferred tax expenseOrigination and reversal of temporary differences 36.6 9.3 29.6 1.2Benefit of tax losses recognised 8.6 7.6 – –

45.2 16.9 29.6 1.2

Total income tax expense 371.4 164.1 102.2 74.2

Numerical reconciliation between tax expense and pre-tax net profitProfit before tax 1,133.5 518.8 620.9 729.6

Prima facie income tax at 30% (2004: 30%) 340.1 155.6 186.2 218.9Increase/(decrease) in income tax expense due to:

Non-deductible depletion and depreciation 3.4 16.6 6.6 0.6Abandonment of exploration 1.2 1.1 (0.6) (0.6)Net impairment (reversal)/loss of investments in controlled entities – – (101.5) 2.9Foreign losses not recognised 18.9 – – –Gain on sale of oil and gas assets (7.1) – – –Tax benefit arising from deferred tax balances upon entering into tax

consolidation regime – (20.0) – (20.0)Dividends from controlled entities – – – (75.5)Non-deductible interest – – – 14.2Gain on sale of oil and gas assets – – – (76.8)Under/(over) provided in prior years 5.5 (10.0) 14.2 19.6Other 9.4 20.8 (2.7) (9.1)

Income tax expense on pre-tax net profit 371.4 164.1 102.2 74.2


82



6. Income Tax Expense (continued) $million $million $million $million

Deferred tax recognised directly in equityHedges of investments in foreign operations (15.7) 5.2 – –Change in available-for-sale financial assets 2.6 – 1.9 –Foreign exchange translation differences 7.1 (2.2) – –Equity raising costs – (3.3) – (3.3)Actuarial (loss)/gain on defined benefit plan (0.2) 1.4 (0.2) 1.4

(6.2) 1.1 1.7 (1.9)

7. Cash and Cash Equivalents

Bank balances 229.2 126.0 65.5 39.3Call deposits – 0.1 – –

229.2 126.1 65.5 39.3

8. Trade and Other Receivables

Trade receivables 294.9 179.3 134.8 72.3Receivables due from controlled entities:

Non-interest-bearing – – 402.1 393.0Interest-bearing – – 549.8 990.0

Tax related balances owing by controlled entities – – 138.9 62.3Prepayments 2.8 18.5 2.5 7.6Insurance proceeds receivable 95.4 116.6 36.0 73.8Other 118.6 106.4 112.1 57.3

511.7 420.8 1,376.2 1,656.3

The interest-bearing amounts owing by controlled entities are for loans made in the ordinary course of business on normal market terms and conditions for an indefinite period.

9. Inventories

Petroleum products 99.1 82.4 55.7 44.8Drilling and maintenance stocks 44.9 35.1 11.6 14.0

144.0 117.5 67.3 58.8

Inventories stated at fair value less costs to sell 21.0 21.4 11.6 14.0

10. Other Assets

CurrentInterest rate swap contracts 27.2 – – –Deferred loss on commodity hedges – 3.2 – 2.3

27.2 3.2 – 2.3

Non-currentOther 1.9 2.9 – –

Annual Report 2005



Consolidated Santos LtdSub-surface Plant and Sub-surface Plant and

assets equipment Total assets equipment Total11. Exploration and Evaluation Assets $million $million $million $million $million $million

Balance at 31 December 2004 271.8 0.2 272.0 14.6 0.4 15.0


Reconciliation of movementsBalance at 1 January 2004 277.5 0.2 277.7 13.5 0.4 13.9Acquisitions 0.7 – 0.7 – – –Additions 216.5 – 216.5 47.6 – 47.6Exploration expensed (117.4) – (117.4) (46.0) – (46.0)Net impairment (losses)/reversals – – – (0.5) – (0.5)Transfer to oil and gas assets (102.7) – (102.7) – – –Foreign currency translation (2.8) – (2.8) – – –


Balance at 1 January 2005 271.8 0.2 272.0 14.6 0.4 15.0Acquisitions 24.9 4.7 29.6 1.2 – 1.2Additions 168.2 0.6 168.8 19.2 – 19.2Exploration expensed (153.5) – (153.5) (19.1) – (19.1)Net impairment (losses)/reversals 6.3 – 6.3 1.2 0.2 1.4Transfer to oil and gas assets – – – – – –Foreign currency translation 15.7 0.2 15.9 – – –



84



assets equipment Total assets equipment Total12. Oil and Gas Assets $million $million $million $million $million $million

2005

Cost at 31 December 2005 6,040.7 4,397.1 10,437.8 2,093.4 1,924.7 4,018.1Less accumulated depreciation, depletion and

impairment (3,451.9) (2,193.4) (5,645.3) (1,163.0) (1,127.7) (2,290.7)

Balance at 31 December 2005 2,588.8 2,203.7 4,792.5 930.4 797.0 1,727.4

Reconciliation of movementsAssets in developmentBalance at 1 January 2005 208.7 341.3 550.0 25.8 17.5 43.3Additions 70.0 134.6 204.6 5.0 78.3 83.3Transfer from exploration and evaluation assets – – – – – –Transfer to producing assets (152.3) (142.0) (294.3) – – –Exploration expensed (2.5) – (2.5) (2.5) – (2.5)Foreign currency translation 2.6 12.7 15.3 – – –


Producing assetsBalance at 1 January 2005 1,670.7 1,515.7 3,186.4 489.8 605.1 1,094.9Acquisitions 597.4 95.1 692.5 360.2 101.4 461.6Additions 336.3 242.0 578.3 115.7 64.7 180.4Transfer from assets in development 152.3 142.0 294.3 – – –Disposals – (0.4) (0.4) – – –Depreciation and depletion expense (330.4) (213.2) (543.6) (104.6) (68.2) (172.8)Exploration expensed (48.2) – (48.2) (9.9) – (9.9)Net impairment reversals/(losses) 62.4 62.6 125.0 50.9 (1.8) 49.1Foreign currency translation 21.8 13.3 35.1 – – –


Total oil and gas assets 2,588.8 2,203.7 4,792.5 930.4 797.0 1,727.4

Annual Report 2005




assets equipment Total assets equipment Total12. Oil and Gas Assets (continued) $million $million $million $million $million $million

2004

Cost at 31 December 2004 4,976.0 3,875.2 8,851.2 1,562.1 1,682.9 3,245.0Less accumulated depreciation, depletion and

impairment (3,096.6) (2,018.2) (5,114.8) (1,046.5) (1,060.3) (2,106.8)


Reconciliation of movementsAssets in developmentBalance at 1 January 2004 151.7 343.4 495.1 22.4 2.6 25.0Additions 115.8 246.6 362.4 3.4 14.9 18.3Transfer from exploration and evaluation assets 102.7 – 102.7 – – –Transfer to producing assets (159.1) (236.8) (395.9) – – –Foreign currency translation (2.4) (11.9) (14.3) – – –


Producing assetsBalance at 1 January 2004 1,488.3 1,274.4 2,762.7 471.7 616.0 1,087.7Acquisitions 173.5 8.3 181.8 – – –Additions 185.0 155.7 340.7 131.1 141.5 272.6Transfer from assets in development 159.1 236.8 395.9 – – –Disposals (21.5) (13.5) (35.0) (27.1) (88.3) (115.4)Depreciation and depletion expense (308.5) (146.5) (455.0) (114.7) (70.0) (184.7)Net impairment reversals 4.8 2.5 7.3 28.8 5.9 34.7Foreign currency translation (10.0) (2.0) (12.0) – – –


Total oil and gas assets 1,879.4 1,857.0 3,736.4 515.6 622.6 1,138.2


86


Consolidated Santos LtdLand and Plant and Land and Plant andbuildings equipment Total buildings equipment Total

13. Other Land, Buildings, Plant and Equipment $million $million $million $million $million $million

Cost at 31 December 2004 97.2 54.9 152.1 55.5 60.4 115.9Less accumulated depreciation, depletion and

impairment (49.7) (35.5) (85.2) (34.0) (39.9) (73.9)


Cost at 31 December 2005 100.2 78.6 178.8 57.1 85.3 142.4Less accumulated depreciation, depletion and

impairment (52.2) (53.1) (105.3) (36.2) (53.8) (90.0)


Reconciliation of movementsBalance at 1 January 2004 47.0 29.1 76.1 19.3 29.1 48.4Additions 2.5 7.9 10.4 3.2 6.9 10.1Disposals – – – – (0.1) (0.1)Depreciation (2.0) (17.9) (19.9) (1.0) (15.6) (16.6)Net impairment reversals – 0.3 0.3 – 0.2 0.2


Balance at 1 January 2005 47.5 19.4 66.9 21.5 20.5 42.0Additions 3.0 20.6 23.6 0.7 24.9 25.6Depreciation (2.5) (14.9) (17.4) (1.3) (13.9) (15.2)Foreign currency translation – 0.4 0.4 – – –


Annual Report 2005



14. Impairment of Cash Generating Units

During the year ended 31 December 2005, the consolidated entity reassessed the recoverable amount of its oil and gas assets in light of increasedoil prices and $144.6 million (31 December 2004: $74.4 million) of previously recognised impairment losses were reversed. The estimates ofrecoverable amounts were based on the assets value in use, determined using a discount rate of 8.7% (2004: 8.8%).

2005 2004Sub-surface Plant and Sub-surface Plant and

assets equipment Total assets equipment TotalCGU Description $million $million $million $million $million $million

Consolidated

SWQ Oil Oil field and pipelines – – – (27.8) (20.2) (48.0)Mereenie Oil and gas field (9.6) (8.4) (18.0) 9.6 8.4 18.0Moonie Oil field (5.3) (5.3) (10.6) – 0.8 0.8Elang-Kakatua Oil field (11.1) (0.7) (11.8) (1.6) (0.1) (1.7)Barrow Oil field (14.1) (16.8) (30.9) 9.5 12.2 21.7East Spar/John Brookes Gas field and

production facility – – – (5.3) (4.0) (9.3)Thevenard Oil field (12.5) (42.3) (54.8) 1.0 3.4 4.4Other – impairment losses 2.2 11.1 13.3 0.5 – 0.5Other – impairment reversals (17.6) (0.2) (17.8) (11.9) (3.3) (15.2)

Australia (68.0) (62.6) (130.6) (26.0) (2.8) (28.8)

USA Gulf Coast Gas field (0.7) – (0.7) 21.4 – 21.4Other – – – (0.2) – (0.2)

International (0.7) – (0.7) 21.2 – 21.2

(68.7) (62.6) (131.3) (4.8) (2.8) (7.6)

Impairment losses 13.3 66.8Impairment reversals (144.6) (74.4)

Net impairment reversal (131.3) (7.6)

Santos LtdSWQ Oil Oil field and pipelines (51.1) – (51.1) (27.8) (3.7) (31.5)Other – impairment losses 2.6 2.1 4.7 1.8 – 1.8Other – impairment reversals (3.6) (0.5) (4.1) (2.3) (2.4) (4.7)

(52.1) 1.6 (50.5) (28.3) (6.1) (34.4)

Impairment losses 4.7 1.8Impairment reversals (55.2) (36.2)

Net impairment reversal (50.5) (34.4)


88



15. Other Investments $million $million $million $million

Equity securities available for sale 14.8 – 11.8 –Investments in other entities at cost – 1.2 – 0.5Investments in controlled entities – at cost – – 2,983.5 2,071.1

14.8 1.2 2,995.3 2,071.6

16. Deferred Tax Assets and Liabilities

Recognised deferred tax assets and liabilitiesDeferred tax assets and liabilities are attributable to the following:

Assets Liabilities Net2005 2004 2005 2004 2005 2004

$million $million $million $million $million $million

ConsolidatedExploration, evaluation, oil and gas assets, other land,

buildings, plant and equipment – – 398.0 362.4 398.0 362.4Other investments (2.6) – – – (2.6) –Trade debtors – – 3.3 0.8 3.3 0.8Sundry debtors – – 19.1 2.6 19.1 2.6Inventories – – 17.2 11.7 17.2 11.7Doubtful debts – (0.2) – – – (0.2)Prepayments – – 1.8 1.9 1.8 1.9Other assets – – 8.1 – 8.1 –Equity-raising costs (2.0) – – – (2.0) –Trade creditors (5.2) (1.7) – – (5.2) (1.7)Non-trade payables and accrued expenses – (1.4) – – – (1.4)Interest-bearing loans and borrowings – – 68.3 94.7 68.3 94.7Employee benefits (16.3) (15.1) – – (16.3) (15.1)Defined benefit obligations (3.4) (3.7) – – (3.4) (3.7)Provisions (1.5) (0.8) – – (1.5) (0.8)Other liabilities – (11.2) – – – (11.2)Other items – – 1.1 – 1.1 –Tax value of loss carry-forwards recognised (30.4) (7.8) – – (30.4) (7.8)

Tax (assets)/liabilities (61.4) (41.9) 516.9 474.1 455.5 432.2Set-off of tax 4.0 (47.7) (4.0) 47.7 – –

Net tax (assets)/liabilities (57.4) (89.6) 512.9 521.8 455.5 432.2

Annual Report 2005



Assets Liabilities Net2005 2004 2005 2004 2005 2004

16. Deferred Tax Assets and Liabilities (continued) $million $million $million $million $million $million

Santos LtdExploration, evaluation, oil and gas assets, other land,

buildings, plant and equipment – – 155.6 145.0 155.6 145.0Other investments – – 1.9 – 1.9 –Trade debtors – – 2.4 – 2.4 –Sundry debtors – – 18.3 – 18.3 –Inventories – – 10.8 8.5 10.8 8.5Doubtful debts – (0.2) – – – (0.2)Prepayments – – 0.3 0.9 0.3 0.9Equity-raising costs (2.0) – – – (2.0) –Non-trade payables and accrued expenses (2.7) (1.5) – – (2.7) (1.5)Employee benefits (15.6) (14.6) – – (15.6) (14.6)Defined benefit obligations (3.4) (3.7) – – (3.4) (3.7)Provisions – (0.8) – – – (0.8)Other items – (0.3) – – – (0.3)

Tax (assets)/liabilities (23.7) (21.1) 189.3 154.4 165.6 133.3Set-off of tax 23.7 21.1 (23.7) (21.1) – –

Net tax (assets)/liabilities – – 165.6 133.3 165.6 133.3

At 31 December 2005, a deferred tax liability of $465.0 million (2004: deferred tax asset of $231.1 million) relating to investments in subsidiarieshas not been recognised because the Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in theforeseeable future.

Unrecognised deferred tax assetsDeferred tax assets have not been recognised in respect of the following items:


$million $million $million $million

Deductible temporary differences 30.4 26.7 – –Tax losses 86.3 97.2 39.1 46.7

116.7 123.9 39.1 46.7

Deferred tax assets have not been recognised in respect of these items because it is notprobable that future taxable profits will be available against which the consolidatedentity can utilise the benefits therefrom. Unrecognised deductible temporary differencesand tax losses of $45.7 million (2004: $49.4 million) will expire between 2006 and 2025.The remaining deductible temporary differences and tax losses do not expire undercurrent tax legislation.

17. Trade and Other Payables

Trade payables 260.2 286.2 89.6 109.5Non-trade payables and accrued expenses 132.0 86.7 54.9 29.1Amounts owing to controlled entities – – 235.1 313.3

392.2 372.9 379.6 451.9


90



18. Interest-Bearing Loans and Borrowings* $million $million $million $million

This note provides information about the contractual terms of the consolidated entity’s interest-bearing loans and borrowings. For more information about the consolidated entity’s exposure to interest rate and foreign currency risk, see note 34.Current liabilitiesAmounts owing to controlled entities – – 2,450.9 1,685.2Bank loans 11.1 5.2 – –Long-term notes – 43.7 – –Other – 1.0 – 1.0

11.1 49.9 2,450.9 1,686.2

The interest-bearing amounts owing to controlled entities are for loans made in the ordinary course of business on normal market terms and conditions for an indefinite period.Non-current liabilitiesBank loans 250.4 222.7 – –Commercial paper 265.5 209.0 – –Medium-term notes 468.5 20.0 – –Long-term notes 832.6 757.8 – –

1,817.0 1,209.5 – –

* Comparative information has been prepared under previous GAAP in accordance with the transition rules in AASB 1 “First-time Adoption of Australian Equivalentsto International Financial Reporting Standards”.

The consolidated entity has entered into interest rate swap contracts to manage the exposure to interest rates. This has resulted in a weightedaverage interest rate on interest-bearing liabilities of 5.89% as at 31 December 2005 (2004: 5.09%). All facilities are unsecured and arrangedthrough a controlled entity, Santos Finance Ltd, and are guaranteed by Santos Ltd.

Details of major credit facilities(a) Bank loans

The consolidated entity has access to the following committed revolving bank facilities:

Revolving facilities at 31 December 2005Amount

Year of maturity Currency A$million

2006 Multi-currency 200.02007 Multi-currency –2008 Multi-currency 300.02009 Multi-currency 200.0

700.0

Revolving bank facilities bear interest at the relevant interbank reference rate plus 0.25% to 0.43%. The amount drawn at 31 December2005 is $nil (2004: $nil).

Annual Report 2005



18. Interest-Bearing Loans and Borrowings (continued)

(a) Bank loans (continued)

Term bank loans at 31 December 2005Amount

Year of maturity Currency A$million

2006 USD 11.12007 USD 21.42008 USD 20.62009 USD 25.62010 USD 26.52011 USD 27.42012 USD 23.52013 USD 19.72014 USD 20.72015 USD 21.12016 USD 21.52017 USD 22.4

261.5

Term bank loans bear interest at the relevant interbank reference rate plus a margin of up to 0.75%. The amount outstanding at 31 December 2005 is US$191.5 million (A$261.5 million) at a weighted average annual effective interest rate of 5.02% (2004: 2.70%).

(b) Commercial paperThe consolidated entity has an $800.0 million (2004: $800.0 million) Australian commercial paper program supported by the revolving bankfacilities referred to in (a) above. At 31 December 2005, $265.5 million (2004: $209.0 million) of commercial paper is on issue and theweighted average annual effective interest rate is 5.83% (2004: 5.61%).

(c) Medium-term notesThe consolidated entity has a $1,000.0 million (2004: $500.0 million) Australian medium-term note program.

Medium-term notes on issue at 31 December 20052005 2004

Year of issue Year of maturity Effective interest rate $million $million

1998 2008 6.61% 20.0 20.02005 2011 6.18% * 349.1 –2005 2015 6.35% 99.4 –

468.5 20.0

* Floating rate of interest.

(d) Long-term notes

Long-term notes on issue at 31 December 20052005 2004 2005 2004

Year of issue Year of maturity Effective interest rate US$million US$million A$million A$million

1993 2005 6.95% – 34.0 – 43.72000 2007 - 2015 8.37% 308.4 290.0 421.0 372.52002 2009 - 2022 6.11% 301.5 300.0 411.6 385.3

609.9 624.0 832.6 801.5


92



19. Employee Benefits $million $million $million $million

CurrentLiability for annual leave 18.6 16.0 17.9 15.5Liability for long service leave 31.1 29.3 30.3 28.9

49.7 45.3 48.2 44.4

Non-currentLiability for defined benefit obligations 11.3 12.5 11.3 12.5

(a) Liability for defined benefit obligationsDefined benefit members of the Santos Superannuation Plan receive a lump sum benefit on retirement, death, disablement and withdrawal. The defined benefit section of the Plan is closed to new members. All new members receive accumulation-only benefits.Movements in the net liability for defined benefit obligations recognised in the balance sheetNet liability at start of year 12.5 19.1 12.5 19.1Expense recognised in income statement 2.9 4.3 2.9 4.3Amount recognised in retained earnings 0.5 (6.0) 0.5 (6.0)Employer contributions (4.6) (4.9) (4.6) (4.9)

Net liability at end of year 11.3 12.5 11.3 12.5

Defined benefit planAmount recognised in the balance sheet:

Liabilities 11.3 12.5 11.3 12.5

The consolidated entity has recognised a liability in the balance sheet in respect of its defined benefit superannuation arrangements. However, the Santos Superannuation Plan does not impose a legal liability on any of its employer sponsors to cover any deficit that exists in the Plan.

Historical information for the current and previous period*Present value of defined benefit obligations 90.7 88.6 90.7 88.6Fair value of Plan assets (79.4) (76.1) (79.4) (76.1)

Deficit in Plan 11.3 12.5 11.3 12.5

Experience adjustments on Plan assets (5.6) (3.9) (5.6) (3.9)Experience adjustments on Plan liabilities (0.1) (3.2) (0.1) (3.2)

* Comparative information has been provided for only one year in accordance with the transition rules in AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards”.

Reconciliation of the present value of the defined benefit obligationsOpening defined benefit obligations 88.6 99.3 88.6 99.3Service cost 4.1 5.0 4.1 5.0Interest cost 3.7 4.5 3.7 4.5Contributions by Plan participants 4.1 4.3 4.1 4.3Actuarial losses/(gains) 6.1 (2.1) 6.1 (2.1)Benefits paid (10.5) (23.2) (10.5) (23.2)Transfers (out)/in (5.4) 0.8 (5.4) 0.8

Closing defined benefit obligations 90.7 88.6 90.7 88.6

Annual Report 2005




19. Employee Benefits (continued) $million $million $million $million

(a) Liability for defined benefit obligations (continued)Reconciliation of the fair value of Plan assetsOpening fair value of Plan assets 76.1 80.2 76.1 80.2Expected return on Plan assets 4.9 5.1 4.9 5.1Actuarial gains 5.6 3.9 5.6 3.9Employer contributions 4.6 5.0 4.6 5.0Contributions by Plan participants 4.1 4.3 4.1 4.3Benefits paid (10.5) (23.2) (10.5) (23.2)Transfers (out)/in (5.4) 0.8 (5.4) 0.8

Closing fair value of Plan assets 79.4 76.1 79.4 76.1

Plan assetsThe percentage invested in each class of Plan assets at the balance sheet date are as follows:


% % % %

Australian equity 35 38 35 38International equity 29 25 29 25Fixed income 15 17 15 17Property 7 7 7 7Cash 14 13 14 13

Fair value of Plan assetsThe fair value of Plan assets does not include any amounts relating to any of Santos’ own financial instruments, property, or any other assetsowned or used by the consolidated entity.

Expected rate of return on Plan assetsThe expected return on assets assumption is determined by weighting the expected long-term return for each asset class by the targetallocation of assets to each class. The returns used for each class are net of investment tax, investment fees and asset-based administrationfees.


% % % %

Principal actuarial assumptions at the balance sheet date (expressed as weighted average)Discount rate 4.5 4.4 4.5 4.4Expected rate of return on Plan assets 6.9 6.4 6.9 6.4Expected salary increase rate:

2004 N/A 4.5 N/A 4.52005 9.0 4.5 9.0 4.52006 7.0 4.5 7.0 4.52007 7.0 4.5 7.0 4.5Later than 2007 5.0 4.5 5.0 4.5

The expected rate of return on Plan assets includes a reduction to allow for asset-based administrative expenses of the Plan.


94



19. Employee Benefits (continued) $million $million $million $million

(a) Liability for defined benefit obligations (continued)Expense recognised in the income statementService cost 4.1 5.0 4.1 5.0Interest cost 3.7 4.5 3.7 4.5Expected return on Plan assets (4.9) (5.1) (4.9) (5.1)

2.9 4.4 2.9 4.4

The expense is recognised in the following line items in the income statement:Other expenses (0.8) (0.1) (0.8) (0.1)Financial expenses 3.7 4.5 3.7 4.5

2.9 4.4 2.9 4.4

Amount recognised in the statement of recognised income and expenseActuarial (losses)/gains (0.5) 4.8 (0.5) 4.8Tax effect 0.2 (1.5) 0.2 (1.5)

Actuarial (losses)/gains (0.3) 3.3 (0.3) 3.3

Summary of the most recent financial position of the Plan31 Dec 04 1 Jan 04 31 Dec 04 1 Jan 04


Net market value of Plan assets 98.6 114.5 98.6 114.5Accrued benefits 98.9 113.5 98.9 113.5

Net (deficit)/surplus (0.3) 1.0 (0.3) 1.0

Expected contributionsThe consolidated entity expects to contribute $5.5 million to the defined benefit superannuation plan in 2006.

Contribution recommendationThe current contribution recommendations as set out in the most recent actuarial valuation of the Plan as at 31 December 2004, are 15.0% ofsalaries of defined benefit members and 9.0% of salaries of defined contribution members. The consolidated entity is currently contributingat these rates.

Funding methodThe method used to determine the employer contribution recommendations at the last actuarial review was the Attained Age Normal method.The method adopted affects the timing of the cost to the consolidated entity.

Under the Attained Age Normal method, a “normal” cost is calculated which is the estimated employer contribution rate required to providebenefits in respect of future service after the review date. The “normal” cost is then adjusted to take into account any surplus (or deficiency)of assets over the value of liabilities in respect of service prior to the review date. Any surplus or deficiency can be used to reduce or increasethe “normal” employer contribution rate over a suitable period of time.

Economic assumptionsThe economic assumptions adopted for the last actuarial review as at 31 December 2004 of the Plan were:

Expected rate of return on plan assets 7.9% in year 1; 7.0% thereafterFuture annual salary increases 9.0%; 7.0%; 7.0%; 5.0% thereafter

(b) Defined contribution plansThe consolidated entity makes contributions to several defined contribution plans. The amount recognised as an expense for the year was$7.2 million (2004: $6.9 million).

Annual Report 2005



19. Employee Benefits (continued)

(c) Share-based payments(i) Current General Employee Share Plans

The Company currently operates two general employee share plans:

• the Santos Employee Share Acquisition Plan (“SESAP”); and

• the Santos Employee Share Purchase Plan (“SESPP”).

Both of these plans have operated since 1997.

SESAPBroadly, SESAP provides for permanent eligible employees with at least a minimum period of service determined by Directors as at theoffer date (one year of completed service for issues so far) to be entitled to acquire shares under this Plan. Executives participating in theExecutive Long-term Incentive Program in 2005, casual employees and Directors of the Company are excluded from participating in thisPlan. Employees are not eligible to participate under the Plan while they are resident overseas unless the Board decides otherwise.

The Plan provides for grants of fully paid ordinary shares in the capital of the Company up to a value determined by the Board which, todate, has been $1,000 per annum per eligible employee. A trustee is funded by the consolidated entity to acquire shares directly from theCompany or on market. The shares are then held by the trustee on behalf of eligible employees who have made applications under the Plan.

The employee’s ownership of shares allocated under the Plan, and his or her right to deal with them, are subject to restrictions until theearlier of the expiration of the restriction period determined by the Board (being three years) and the time when he or she ceases to bean employee. Participants are entitled to instruct the trustee as to the exercise of voting rights, receive dividends and participate inbonus and rights issues during the restriction period. Shares are granted to eligible employees at no cost to the employee.

Summary of share movements in the SESAP during 2005 (and comparative 2004 information):

Opening Granted during Distributionsbalance the year during the year Closing balance

Fair value Fair value Fair valueGrant dates Number Number per share Number aggregate Number aggregate

$ $ $

20052 September 2002 162,864 – – 162,864 1,854,533 – –2 September 2003 200,754 – – 27,531 287,283 173,223 2,121,98222 November 2004 156,770 – – 19,764 208,725 137,006 1,678,32318 November 2005 – 106,744 11.24 2,288 26,921 104,456 1,279,586

520,388 106,744 212,447 2,377,462 414,685 5,079,891

200424 August 2001 177,908 – – 177,908 1,180,728 – –2 September 2002 195,624 – – 32,760 227,623 162,864 1,381,0872 September 2003 242,991 – – 42,237 294,081 200,754 1,702,39422 November 2004 – 157,014 8.14 244 2,089 156,770 1,329,410

616,523 157,014 253,149 1,704,521 520,388 4,412,891

Shares are allocated at a price equal to the weighted average sale price of the Company’s ordinary shares on the Australian StockExchange during the one week period up to and including the Grant Date. This is shown as fair value per share for shares granted duringthe year. The fair value of shares distributed from the trust during the year and remaining in the trust at the end of the financial year isthe market price of shares of the Company on the Australian Stock Exchange as at close of trading on the respective dates.

Distributions during the year occurred at various dates throughout the year and therefore have not been separately listed.


96



(c) Share-based payments (continued)(i) Current General Employee Share Plans (continued)

The amounts recognised in the financial statements of the consolidated entity and the Company in relation to SESAP during the year were:Consolidated Santos Ltd

2005 2004 2005 2004$million $million $million $million

Employee expenses 1.2 1.2 1.2 1.2Issued ordinary share capital 1.2 1.3 1.2 1.3

At 31 December 2005, the total number of shares acquired under the Plan since its commencement was 1,981,031.

SESPPThe general employee offer under SESPP is open to all employees (other than a casual employee or Director of the Company) determinedby the Board who are continuing employees at the date of the offer. However, employees who are not resident in Australia at the time ofan offer under the Plan and those who have participated in the Executive Long Term Incentive Program during the year will not be eligibleto participate in that offer unless the Board otherwise decides.

Under the Plan, eligible employees may be offered the opportunity to subscribe for or acquire fully paid ordinary shares in the capital ofthe Company at a discount to market price, subject to restrictions, including on disposal, determined by the Board (which has been aperiod of one year for issues so far). The subscription or acquisition price is Market Value (being the weighted average sale price of theCompany’s ordinary shares on the Australian Stock Exchange during the one week period up to and including the offer date) less anydiscount determined by the Board (5% for issues so far). Under the Plan, at the discretion of the Board, financial assistance may beprovided to employees to subscribe for and acquire shares under the Plan. The 5% discount constitutes financial assistance for thesepurposes. Participants are entitled to vote, receive dividends and participate in bonus and rights issues while the shares are restricted.

On 18 November 2005, the Company issued 49,800 ordinary shares to 84 eligible employees at a subscription price of $10.67 per shareunder the Plan. The total market value of those shares on the issue date was $559,254, being the market price at the close of trade on thedate of issue and the total amount received from employees for those shares was $531,366.

A summary of share movements in the SESPP are set out below:

Opening Granted during Restriction ceased Closingbalance the year during the year balance

Fair valueGrant dates Number Number per share Number Date Number

$

200526 November 2004 32,400 – – 32,400 26 November 2005 –18 November 2005 – 49,800 11.24 – – 49,800

32,400 49,800 32,400 49,800

20047 March 2003 7,800 – – 7,800 7 March 2004 –8 September 2003 15,400 – – 15,400 8 September 2004 –26 November 2004 – 32,400 8.14 – – 32,400

23,200 32,400 23,200 32,400

The fair value per share for shares granted during the year is Market Value (as defined above). The consideration received by theCompany per share is Market Value less the discount of 5% referred to above.

The amounts recognised in the financial statements of the consolidated entity and the Company in relation to the general employee offerunder the SESPP during the year were:



Issued ordinary share capital 0.5 0.3 0.5 0.3

At 31 December 2005, the total number of shares acquired under the general employee offer of the Plan since its commencementwas 759,000.

Annual Report 2005




(c) Share-based payments (continued)

(ii) Executive Long-term Incentive ProgramThe Company’s Executive Long-term Incentive Program provides for invitations to be extended to eligible executives selected by theBoard. Participation will be limited to those executives who, in the opinion of the Board, are able to significantly influence the generationof shareholder wealth. Directors envisage the Program applying to up to 50 executives.

The Program currently consists of an offer of securities under:

• the Santos Employee Share Purchase Plan (“SESPP”); and

• the Santos Executive Share Option Plan (“SESOP”).

SESOP has operated since 1997, the SESPP has been used as a component of executive compensation since 2003.

SESPPThe shares allocated pursuant to the Plan were allotted to a trustee at no cost to participants, to be held on their behalf. The allocationprice is Market Value (as defined below) and the trustee was funded by the Company to subscribe for the shares.

In general the shares were restricted for a period of one year from the date of allotment. If a participating executive ceased employmentduring this period, the Board in its discretion could determine that a lesser restriction on transfer and dealing applied, having regard tothe circumstances of the cessation. The shares can remain on trust for up to four years from the date of allotment, during which time theshares are subject to forfeiture if participants act fraudulently or dishonestly or in breach of their obligations to any Group Company.Participants are entitled to instruct the trustee as to the exercise of voting rights, receive dividends and participate in bonus and rightsissues while the shares are held on trust.

No shares were issued under the executive long-term incentive component of the Plan during 2005 (2004: 91,248).

A summary of share movements in the executive long term incentive component of the SESPP are set out below:

Opening Granted during Restriction ceased Closingbalance the year during the year balance

Fair valueGrant dates Number Number per share Number Date Number

$

200527 January 2004 3,397 – – 3,397 27 January 2005 –1 July 2004 87,851 – – 3,496 1 February 2005 –

5,026 16 March 2005 –3,847 4 April 2005 –

75,482 1 July 2005 –

91,248 – 91,248 –

200422 December 2003 129,664 – – 3,818 3 May 2004 –

3,548 1 June 2004 –7,273 8 June 2004 –7,331 2 July 2004 –4,364 19 July 2004 –

103,330 22 December 2004 –27 January 2004 – 3,397 6.38 – – 3,3971 July 2004 – 87,851 6.95 – – 87,851

129,664 91,248 129,664 91,248

The fair value per share for shares granted during the year and the consideration received by the Company per share is Market Value(being the weighted average sale price of the Company’s ordinary shares on the Australian Stock Exchange during the one weekperiod up to and including the offer date).


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(ii) Executive Long-term Incentive Program (continued)The amounts recognised in the financial statements of the consolidated entity and the Company in relation to the executive long-termincentive component of the SESPP during the year were:



Employee expenses – 0.6 – 0.6Issued ordinary share capital – 0.6 – 0.6

At 31 December 2005, the total number of shares acquired under the executive long-term incentive component of the Plan since itscommencement was 220,912.

SARs and optionsDuring the year eligible senior executives are invited to acquire SARs or options, at the executive’s election. Each SAR and option is aconditional entitlement to a fully paid ordinary share, subject to the satisfaction of performance conditions, on terms and conditionsdetermined by the Board.

SARs and options carry no voting or dividend rights until the performance conditions are satisfied and, in the case of options, when theoptions are exercised or, in the case of SARs, when the SARs vest.

SARs and options are granted at no cost to the executives with the number of shares awarded being determined by dividing the amount ofthe award by the volume weighted average price of the Company’s shares over the five business days up to and including the award date.The number of options awarded is of equivalent value calculated by an independent expert based on an acceptable valuation method.

The exercise price of the options is the volume weighted average price of the Company’s shares over the five business days up to andincluding the award date. Options have a life of up to 10 years.

The Board intends that long-term incentive (“LTI”) awards be made on an annual basis using a three-year measurement period for theapplicable performance hurdles. However, the Board reserves the right to suspend or modify the LTI program in light of circumstancesappropriate to the Company from time to time.

SARs and options vest where the Company achieves a prescribed performance hurdle or exercise condition. To reach the performancehurdle, the Company’s Total Shareholder Return (broadly, growth in share price plus dividends reinvested) (“TSR Growth”) over athree-year performance period is compared to the following comparator groups:

• as to 50% of each grant – the ASX 100 at the beginning of the relevant performance period; and

• as to the other 50% of each grant – the energy and petroleum companies in the ASX Energy Index with market capitalisation above$400 million, plus international energy and petroleum companies.

The following table sets out the vesting schedule for the SARs and options:

Performance – Santos TSR ranking against TSR ranking of each company in the comparator group % of SARs that vest or options which become exercisable

TSR < 50th percentile of comparator group 0%TSR = 50th percentile of comparator group 50%TSR between 51st and 74th percentile of comparator group Progressive vesting from 52% to 98% pro-rata vesting

(2% increase for each percentile improvement)TSR ≥ 75th percentile of comparator group 100%

SARs which have not vested and options which are not exercisable at the time of an executive ceasing employment will, in general, lapseand be forfeited. If cessation is due to death, redundancy or where the Board consents, a proportionate number of SARs may vest oroptions may be exercised, at the Board’s discretion, or otherwise based on pro-rata performance.

The fair value of shares issued as a result of exercising the options during the reporting period at their issue date is the market price ofshares of the Company on the Australian Stock Exchange as at close of trading.

The amounts recognised in the financial statements of the consolidated entity and the Company in relation to executive share optionsexercised during the financial year were:



Issued ordinary share capital 25.6 4.1 25.6 4.1

Annual Report 2005





(ii) Executive Long-term Incentive Program (continued)During the financial year, the Company granted 1,166,000 options over unissued shares as set out below.

2005 2004Weighted Weighted

average averageexercise Number of options exercise Number of

price A B C Type 1 Type 2 Total price options

Outstanding at the beginning of the period $6.12 – – – 338,462 5,175,000 5,513,462 $6.04 5,998,314

Granted during the period $8.46 139,800 342,900 683,300 – – 1,166,000 $6.95 330,148

Forfeited during the period – – – – – – – $6.45 (100,000)

Exercised during the period $6.00 – – – (136,134) (4,125,000) (4,261,134) $5.71 (715,000)

Outstanding at the end of the period $7.47 139,800 342,900 683,300 202,328 1,050,000 2,418,328 $6.12 5,513,462

Exercisable at the end of the period $6.48 – – – 202,328 750,000 952,328 $6.00 2,983,314

The options outstanding at 31 December 2005 have an exercise price in the range of $6.20 to $8.46, and a weighted average contractuallife of seven years.

During the year 4,261,134 options were exercised (2004: 715,000). The weighted average share price at the dates of exercise was $9.91(2004: $7.03).

The fair value of services received in return for share options granted are measured by reference to the fair value of share options granted.The estimate of the fair value of the services received is measured based on the Monte Carlo Simulation Method (2004: Black-Scholes model).The contractual life of the option is used as an input into this model. Expectations of early exercise are incorporated into the models.

2005 2004Option grant A B C Type 1* Type 2*

Fair value at measurement date $0.59 $0.90 $1.15 $0.67 $0.73Share price $8.48 $8.48 $8.48 $6.95 $6.95Exercise price $8.461 $8.461 $8.461 $6.95 $6.95Expected volatility (weighted average) 21% 21% 21% 16.13% 16.13%Option life (weighted average) 1 year 2 years 3 years Medium 3–5 yearsExpected dividends 3.5% 3.5% 3.5% 5.22% 5.22%Risk free interest rate (based on national government bonds) 5.33% 5.06% 5.11% 5.99% 5.99%

* Type 1 options have a one year vesting period with no performance hurdle.Type 2 options have a performance hurdle which requires the TSR growth of the Company during the time period of measurement to have at leastequalled 10% per annum calculated on a compound basis for that period. The time period of measurement commences three years from the grant dateof the options and ceases 59 months and one day from the grant date of the options.

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share options),adjusted for any expected changes to future volatility due to publicly available information.


100




(ii) Executive Long-term Incentive Program (continued)The amounts recognised in the income statements of the consolidated entity and the Company during the financial year in relation toexecutive share options granted were:



Employee expenses 0.5 0.1 0.5 0.1

During the financial year, the Company granted 862,600 SARs as set out below. Shares allocated on vesting of SARs will be subject tofurther restrictions on dealing for a maximum of ten years after the original grant date. No amount is payable on grant or vesting ofthe SARs.

Number of SARs2005 2004

A B C Total

Outstanding at the beginning of the period – – – – –Granted during the period 286,500 270,100 306,000 862,600 –Forfeited during the period (17,700) (17,700) (17,700) (53,100) –

Outstanding at the end of the period 268,800 252,400 288,300 809,500 –

Exercisable at the end of the period 268,800 – – 268,800 –

The fair value of services received in return for SARs granted are measured by reference to the fair value of SARs granted. The estimate ofthe fair value of the services received is measured based on the Monte Carlo Simulation Method. The contractual life of the SARs is used asan input into this model. Expectations of early exercise are incorporated into the Monte Carlo Simulation Method.

2005 2004SARs grant A B C

Fair value at measurement date $3.59 $4.17 $4.63 –Share price $8.48 $8.48 $8.48 –Exercise price – – – –Expected volatility (weighted average) 21% 21% 21% –Right life (weighted average) 1 year 2 years 3 years –Expected dividends 3.5% 3.5% 3.5% –Risk free interest rate (based on national government bonds) 5.33% 5.06% 5.11% –

The expected volatility is based on the historic volatility (calculated based on the weighted average remaining life of the share rights),adjusted for any expected changes to future volatility due to publicly available information.

The amounts recognised in the income statements of the consolidated entity and the Company in relation to SARs granted during thefinancial year were:



Employee expenses 1.9 – 1.9 –

(iii) Legacy Plan – Santos Executive Share PlanThe Santos Executive Share Plan operated between 1987 and 1997, when it was discontinued.

Under the terms of the Plan, shares were issued as partly paid to one cent. While partly paid, the Plan shares are not transferable, carry novoting right and no entitlement to dividend but are entitled to participate in any bonus or rights issue. After a “vesting” period, callscould be made for the balance of the issue price of the shares, which varied between $2.00 and the market price of the shares on the dateof the call being made.

Shares were issued principally on: 22 December 1987; 7 February and 5 December 1989; and 24 December 1990.

At the beginning of the financial year there were 181,000 Plan shares on issue. During the financial year 93,000 Plan shares were fullypaid and aggregate proceeds of $295,985 received by the Company. As at 31 December 2005 there were 88,000 Plan Shares outstanding.

Annual Report 2005





(iv) Restricted sharesOn his appointment as Chief Executive Officer on 13 December 2000, 1,000,000 Restricted Shares were issued to Mr J C Ellice-Flint. TheRestricted Shares were issued for nil consideration and held by a trustee subject to Mr Ellice-Flint completing five years’ service with theCompany. As Mr Ellice-Flint satisfied the condition on 12 December 2005, legal title of the shares passed unrestricted to him on that date.


20. Provisions $million $million $million $million

CurrentRestoration 20.5 16.0 4.4 0.9Non-executive Directors’ retirement benefits 2.2 0.2 2.2 0.2

22.7 16.2 6.6 1.1

Non-currentRestoration 198.9 166.3 59.7 32.2Non-executive Directors’ retirement benefits – 2.2 – 2.2

198.9 168.5 59.7 34.4

Total Non-executive

Directors’Total retirement

restoration benefits Total$million $million $million

ConsolidatedBalance at 1 January 2005 182.3 2.4 184.7Provisions made during the year 32.3 – 32.3Provisions used during the year (9.7) (0.2) (9.9)Unwind of discount 14.5 – 14.5

Balance at 31 December 2005 219.4 2.2 221.6

Santos LtdBalance at 1 January 2005 33.1 2.4 35.5Provisions made during the year 26.1 – 26.1Provisions used during the year (0.3) (0.2) (0.5)Unwind of discount 5.2 – 5.2

Balance at 31 December 2005 64.1 2.2 66.3

RestorationProvisions for future environmental restoration are recognised where there is a present obligation as a result of exploration, development,production, transportation or storage activities having been undertaken, and it is probable that an outflow of economic benefits will be required tosettle the obligation. The estimated future obligations include the costs of removing facilities, abandoning wells and restoring the affected areas.

Non-executive Directors’ retirement benefitsAgreements exist with the Non-executive Directors appointed prior to 1 January 2004 providing for the payment of a sum on retirement fromoffice as a Director in accordance with shareholder approval at the 1989 Annual General Meeting. Such benefits ceased to accrue with effect from30 June 2004. These benefits have been fully provided for by the Company.

During the year, a retirement payment was made to Mr F Conroy who retired as a Director in December 2004. A retirement payment will be madein 2006 to Mr G McGregor who retired in September 2005.


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21. Other Liabilities $million $million $million $million

CurrentDeferred foreign currency fluctuations on borrowings – 3.4 – –Accrued fluctuations on foreign currency swaps – 11.2 – –Other 1.8 – 1.3 –

1.8 14.6 1.3 –

Non-currentDeferred foreign currency fluctuations on borrowings – 33.8 – –Other 6.3 – – –

6.3 33.8 – –

22. Capital and Reserves

Reconciliation of movement in capital and reserves attributable to equity holders of Santos Ltd

Share Translation Hedging Fair value Retained Totalcapital reserve reserve reserve earnings equity


ConsolidatedBalance at 1 January 2004 1,893.1 (154.7) – – 268.5 2,006.9Movement per recognised income and expense statement – (40.6) – – 358.1 317.5Share options exercised by employees 4.1 – – – – 4.1Shares issued 594.5 – – – – 594.5Share buy-back (350.0) – – – (2.4) (352.4)Dividends to shareholders – – – – (212.8) (212.8)

Balance at 31 December 2004 2,141.7 (195.3) – – 411.4 2,357.8

Balance at 1 January 2005 2,141.7 (195.3) – – 411.4 2,357.8Movement per recognised income and expense statement – 11.0 – 6.0 761.8 778.8Share options exercised by employees 25.6 – – – – 25.6Shares issued 44.8 – – – – 44.8Dividends to shareholders – – – – (243.0) (243.0)

Balance at 31 December 2005 2,212.1 (184.3) – 6.0 930.2 2,964.0

Santos LtdBalance at 1 January 2004 1,893.1 – – – 63.0 1,956.1Movement per recognised income and expense statement – – – – 658.8 658.8Share options exercised by employees 4.1 – – – – 4.1Shares issued 594.5 – – – – 594.5Share buy-back (350.0) – – – (2.4) (352.4)Dividends to shareholders – – – – (212.8) (212.8)

Balance at 31 December 2004 2,141.7 – – – 506.6 2,648.3

Balance at 1 January 2005 2,141.7 – – – 506.6 2,648.3Movement per recognised income and expense statement – – – 4.4 520.8 525.2Share options exercised by employees 25.6 – – – – 25.6Shares issued 44.8 – – – – 44.8Dividends to shareholders – – – – (243.0) (243.0)

Balance at 31 December 2005 2,212.1 – – 4.4 784.4 3,000.9

Annual Report 2005




22. Capital and Reserves (continued) $million $million $million $million

Share capital594,301,771 (2004: 585,520,675) ordinary shares, fully paid 1,627.6 1,557.2 1,627.6 1,557.288,000 (2004: 181,000) ordinary shares, paid to one cent – – – –6,000,000 (2004: 6,000,000) redeemable convertible preference shares 584.5 584.5 584.5 584.5

2,212.1 2,141.7 2,212.1 2,141.7

2005 2004 2005 2004Note Number of shares $million $million

Movement in fully paid ordinary sharesBalance at the beginning of the year 585,520,675 584,475,013 1,557.2 1,550.8Santos Executive Share Plan 19 93,000 50,000 0.3 0.1Santos Employee Share Acquisition Plan 19 106,744 157,014 1.2 1.3Shares issued on exercise of options 19 4,261,134 715,000 25.6 4.1Dividend Reinvestment Plan a 4,270,418 – 42.8 –Santos Employee Share Purchase Plan 19 49,800 123,648 0.5 0.9

Balance at the end of the year 594,301,771 585,520,675 1,627.6 1,557.2

Movement in reset convertible preference sharesBalance at the beginning of the year – 3,500,000 – 342.3Transfer to redeemable convertible preference shares – – – 7.7Shares redeemed b – (3,500,000) – (350.0)

Balance at the end of the year – – – –

Movement in redeemable convertible preference sharesBalance at the beginning of the year 6,000,000 – 584.5 –Shares issued c – 6,000,000 – 600.0Share-issue cost – – – (7.8)Transfer from reset convertible preference shares – – – (7.7)

Balance at the end of the year 6,000,000 6,000,000 584.5 584.5

The market price of the Company’s ordinary shares on 31 December 2005 was $12.25 (2004: $8.48). Ordinary shares entitle the holder toparticipate in dividends and the proceeds on winding up of the Company in proportion to the number of and amounts paid on the shares held.This is subject to the prior entitlements of the reset convertible preference shares.

(a) Dividend Reinvestment PlanThe Santos Dividend Reinvestment Plan is in operation. Shares are allocated at the daily weighted average market price of the Company’sshares on the ASX over a period of seven business days commencing on the business day after the Dividend Record Date. At this time, theBoard has determined that no discount will apply.

(b) Reset convertible preference shares redemption and buy-backOn 30 September 2004, through a redemption and buy-back arrangement, the Company cancelled its entire 3,500,000 reset convertiblepreference shares on issue at that date. 2,865,821 shares were redeemed at face value and reinvested in redeemable convertible preferenceshares, 489,774 shares were bought back for $105 each and cancelled, and 144,405 shares were redeemed at face value. This redemption andbuy-back resulted in an amount of $350,000,000 being debited against the Company’s capital account and an amount of $2,448,870 beingdebited against retained profits representing the $5.00 premium paid over the issue price in the buy-back of the 489,774 reset convertiblepreference shares.

(c) Redeemable convertible preference sharesOn 30 September 2004, the Company issued 6,000,000 redeemable convertible preference shares at $100 each, which resulted in an amount of$600,000,000 being credited to the Company’s capital account before deducting the costs of issue.


104


22. Capital and Reserves (continued)

Share capital (continued)(c) Redeemable convertible preference shares (continued)

Under the terms of the redemption and buy-back, those shareholders whose reset convertible preference shares were redeemed at face value andreinvested in redeemable convertible preference shares were entitled to a $5.00 per share special dividend which was paid on 7 October 2004.

Redeemable convertible preference shareholders receive a floating preferential, non-cumulative dividend which incorporates the value offranking credits (i.e. it is on a grossed up basis), set at the Bank Bill Swap Rate for 180-day bills plus a margin. Dividends on redeemableconvertible preference shares are in priority to any dividend declared on ordinary class shares. Redeemable convertible preferenceshareholders are not entitled to vote at any general meetings, except in the following circumstances:

(i) on a proposal:

(1) to reduce the share capital of the Company;

(2) that affects rights attached to the redeemable convertible preference shares;

(3) to wind up the Company; or

(4) for the disposal of the whole of the property, business and undertaking of the Company;

(ii) on a resolution to approve the terms of a buy-back agreement;

(iii) during a period in which a dividend or part of a dividend on the redeemable convertible preference shares is in arrears; or

(iv) during the winding up of the Company.

In the event of the winding up of the Company, redeemable convertible preference shares will rank for repayment of capital behind allcreditors of the Company, but ahead of the ordinary class shares.

The redeemable convertible preference shares may, at the sole discretion of the Company, be converted into ordinary class shares and/orexchanged.

Translation reserveThe foreign currency translation reserve comprises all foreign exchange differences arising from the translation of the financial statementsof foreign operations where their functional currency is different to the presentation currency of the reporting entity, as well as from thetranslation of liabilities that hedge the Company’s net investment in a foreign subsidiary and exchange differences that arise on the translation ofmonetary items that form part of the net investment in a foreign operation.

Hedging reserveThe hedging reserve comprises the effective portion of the cumulative net change in the fair value of cash flow hedging instruments relatedto hedged transactions that have not yet occurred.

Fair value reserveThe fair value reserve includes the cumulative net change in the fair value of available-for-sale investments until the investment is derecognised.

Annual Report 2005



22. Capital and Reserves (continued)

DividendsDividends recognised during the year by the Company are:

Dollars Total Franked/per share $million unfranked Payment date

2005Interim 2005 redeemable preference $2.6538 15.9 Franked 30 Sep 2005Final 2004 redeemable preference $2.4497 14.7 Franked 31 Mar 2005Interim 2005 ordinary $0.18 106.6 Franked 30 Sep 2005Final 2004 ordinary $0.18 105.8 Franked 31 Mar 2005

243.0

2004Special 2004 redeemable preference $5.00 14.3 Franked 7 Oct 2004Interim 2004 reset preference $3.2940 11.5 Franked 30 Sep 2004Final 2003 reset preference $3.2940 11.5 Franked 31 Mar 2004Interim 2004 ordinary $0.15 87.8 Franked 30 Sep 2004Final 2003 ordinary $0.15 87.7 Franked 31 Mar 2004

212.8

Franked dividends paid during the year were franked at the tax rate of 30%.

After the balance sheet date the following dividends were proposed by the Directors. The dividends have not been provided for and there are no income tax consequences.

Final 2005 preference $2.5300 15.2 Franked 31 Mar 2006Final 2005 ordinary $0.20 118.9 Franked 31 Mar 2006

134.1

The financial effect of these dividends have not been brought to account in the financial statements for the year ended 31 December 2005and will be recognised in subsequent financial reports.

Santos Ltd2005 2004

$million $million

Dividend franking account30% franking credits available to shareholders of Santos Ltd for future distribution, after adjusting for

franking credits which will arise from the payment of the current tax liability at 31 December 2005 570.8 394.7

The ability to utilise the franking credits is dependent upon there being sufficient available profits to declare dividends.

The impact on the dividend franking account of dividends proposed after the balance sheet date but not recognised as a liability is to reduceit by $57.5 million (2004: $51.6 million).


106


Consolidated2005 2004

23. Earnings per Share $million $million

Earnings used in the calculation of basic earnings per share reconciles to the net profit after tax in the income statement as follows:

Net profit after income tax 762.1 354.7Less:

Special dividend on redeemable convertible preference shares – (14.3)Dividends paid on reset convertible preference shares – (23.0)

Earnings used in the calculation of diluted earnings per share 762.1 317.4Less:

Dividends paid on redeemable convertible preference shares (30.6) –

Earnings used in the calculation of basic earnings per share 731.5 317.4

2005 2004Number of shares

The weighted average number of shares used for the purposes of calculating diluted earnings per share reconciles to the number used to calculate basic earnings per share as follows:

Basic earnings per share 587,935,245 584,924,130

Partly paid shares 79,299 109,843Executive share options 1,337,318 779,536Share acquisition rights 524,650 –Redeemable convertible preference shares 57,450,099 –

Diluted earnings per share 647,326,611 585,813,509

Partly paid shares outstanding issued under the Santos Executive Share Plan; options outstanding issued under the Santos Executive Share OptionPlan; share acquisition rights issued to eligible executives, and redeemable convertible preference shares have been classified as potentialordinary shares and included in the calculation of diluted earnings per share. The number of shares included in the calculation are those assumedto be issued for no consideration, being the difference between the number that would have been issued at the exercise price and the number thatwould have been issued at the average market price.

During the year, 4,261,134 (2004: 715,000) options and 93,000 (2004: 50,000) partly paid shares were converted to ordinary shares. The dilutedearnings per share calculation includes that portion of these options and partly paid shares assumed to be issued for nil consideration, weightedwith reference to the date of conversion. The weighted average number included is 707,164 (2004: 20,101).

No options lapsed during the year (2004: 100,000). The diluted earning per share calculation includes that portion of these options assumed to beissued for nil consideration, weighted with reference to the date the options lapsed. The weighted average number included is nil (2004: 7,405).

The redeemable convertible preference shares and reset convertible preference shares on issue in 2004 were not included in the calculation ofdiluted earnings per share in 2004 as they were antidilutive for that period.

Annual Report 2005



24. Consolidated Entities

Name Country ofincorporation

Santos Ltd (Parent Entity) AUSTControlled entities1:Alliance Petroleum Australia Pty Ltd AUSTBasin Oil Pty Ltd2 AUSTBoston L.H.F. Pty Ltd AUSTBridgefield Pty Ltd AUSTBridge Oil Developments Pty Limited AUSTCanso Resources Pty Ltd AUSTCoveyork Pty Ltd AUSTDoce Pty Ltd AUSTFarmout Drillers Pty Ltd AUSTKipper GS Pty Ltd AUSTControlled entity of Kipper GS Pty Ltd

Crusader (Victoria) Pty Ltd AUSTMoonie Pipeline Company Pty Ltd AUSTReef Oil Pty Ltd AUSTSantos Asia Pacific Pty Ltd AUSTControlled entities of Santos Asia Pacific Pty Ltd

Santos (Sampang) Pty Ltd AUSTSantos (Warim) Pty Ltd AUST

Santos Australian Hydrocarbons Pty Ltd AUSTSantos (BOL) Pty Ltd AUSTControlled entity of Santos (BOL) Pty Ltd

Bridge Oil Exploration Pty Limited AUSTSantos Darwin LNG Pty Ltd AUSTSantos Direct Pty Ltd AUSTSantos Facilities Pty Ltd AUSTSantos Finance Ltd AUSTSantos Globe Pty Ltd AUSTSantos International Holdings Pty Ltd AUSTControlled entities of Santos International Holdings Pty Ltd

Barracuda Limited PNGLavana Limited PNGNovus Nominees Pty Ltd4 AUSTSantos UK (Kakap 2) Limited (formerly Novus UK

(Kakap 2) Limited) UKPeko Offshore Ltd (in liquidation) BERSanro Insurance Pte Ltd SINGSantos Americas and Europe Corporation USAControlled entities of Santos Americas and Europe Corporation

Santos USA Corp USATipperary Corporation2 USAControlled entities of Tipperary Corporation

Burro Pipeline Inc2 USATipperary Qld Inc2 USATipperary Oil & Gas Corporation2 USAControlled entities of Tipperary Oil & Gas Corporation

Tipperary CSG Inc2 USATipperary Oil & Gas (Australia) Pty Ltd2 AUSTControlled entity of Tipperary Oil & Gas

(Australia) Pty LtdTipperary Pastoral Company Pty Ltd2 AUST

Name Country ofincorporation

Santos (Bawean) Pty Ltd AUSTSantos (BBF) Pty Ltd3 AUSTSantos Brantas Pty Ltd AUSTSantos (Donggala) Pty Ltd AUSTSantos Egypt Pty Ltd AUSTSantos Hides Ltd PNGSantos International Operations Pty Ltd AUSTSantos (Madura Offshore) Pty Ltd AUSTSantos Niugini Exploration Limited PNGSantos (Nth Bali 1) Pty Ltd AUSTSantos (Papalang) Pty Ltd AUSTSantos (Popodi) Pty Ltd AUSTSantos (SPV) Pty Ltd3 AUST

Santos (JPDA 91-12) Pty Ltd AUSTSantos (NGA) Pty Ltd AUSTSantos (NARNL Cooper) Pty Ltd (formerly Novus Australia

Resources NL) AUSTSantos (N.T.) Pty Ltd AUSTControlled entity of Santos (N.T.) Pty Ltd

Bonaparte Gas & Oil Pty Limited AUSTSantos Offshore Pty Ltd AUSTSantos Oil Exploration (Malaysia) Sdn Bhd (in liquidation) MALSantos Petroleum Pty Ltd AUSTSantos QNT Pty Ltd AUSTControlled entities of Santos QNT Pty Ltd

Santos QNT (No. 1) Pty Ltd AUSTControlled entities of Santos QNT (No. 1) Pty Ltd

Santos Petroleum Management Pty Ltd AUSTSantos Petroleum Operations Pty Ltd AUSTTMOC Exploration Proprietary Limited AUST

Santos QNT (No. 2) Pty Ltd AUSTControlled entities of Santos QNT (No. 2) Pty Ltd

Associated Petroleum Pty Ltd AUSTMoonie Oil Pty Ltd AUSTPetromin Pty Ltd AUSTSantos (299) Pty Ltd AUSTSantos Exploration Pty Ltd AUSTSantos Gnuco Pty Ltd AUSTTransoil Pty Ltd AUST

Santos Resources Pty Ltd AUSTSantos (TGR) Pty Ltd (formerly Trinity Gas Resources Pty Ltd)2 AUSTSantos Timor Sea Pipeline Pty Ltd AUSTSesap Pty Ltd AUSTVamgas Pty Ltd AUST

1. Beneficial interests in all controlled entities are 100% except for Kipper GSPty Ltd in which two shares of the total issued capital of 9,246,353 sharesare owned by a third party.

2. Company acquired during the year. Refer note 25.3. Company incorporated during the year.4. Company acquired as part of Novus UK (Kakap 2) Limited acquisition in

2004.


108


24. Consolidated Entities (continued)

NotesCountry of incorporationAUST – Australia

BER – Bermuda

MAL – Malaysia

PNG – Papua New Guinea

SING – Singapore

UK – United Kingdom

USA – United States of America

In the financial statements of the Company, investments in controlled entities are measured at cost.

25. Acquisitions of Subsidiaries

During the financial year the following controlled entities were acquired and their operating results have been included in the income statementfrom the date of acquisition:

Contribution toBeneficial Purchase consolidated profit

interest acquired consideration since acquisitionName of entity Date of acquisition % $million $million

Basin Oil Pty Ltd 17 February 2005 100 89.6 8.5Santos (TGR) Pty Ltd 31 August 2005 100 18.5 3.6Tipperary Corporation 1 July 2005 100 450.9 (7.0)

Basin Oil Pty Ltd holds interests in the Patricia Baleen gas field and associated processing facilities (40%); Sole gas field (40%); Golden Beach gasfield (33%), VIC/P55 exploration block (55%); and the South Australian Cooper Basin (2.1%). This acquisition resulted in Santos holding a 100%interest in the Golden Beach gas field and, as part of its strategy to sell non-core assets, in July 2005 Santos entered into an agreement with CapeEnergy Group to sell its 100% working interest in permit VIC/RL1 which contained the Golden Beach gas field.

Santos (TGR) Pty Ltd (formerly Trinity Gas Resources Pty Ltd) holds a 10% interest in the Patricia Baleen gas field and production facilities and theSole gas field.

The acquisition of Tipperary Corporation provided Santos with an approximately 72% revenue interest in the producing Fairview coal seammethane field, and approximately 4,000 km2 of additional exploration acreage in the Bowen Basin. This acquisition has been provisionallyaccounted because at balance date the fair value of the net assets acquired has not been finally determined. The amount of deferred tax liabilitiesto be recognised requires each of the assets and liabilities acquired to have their relevant tax base for income tax purposes assigned. This issubject to a valuation process, which at balance date is incomplete.

If the acquisitions had occurred on 1 January 2005, consolidated entity revenue would have been approximately $2,535.7 million and net profitwould have decreased to $757.8 million.

Annual Report 2005



25. Acquisitions of Subsidiaries (continued)

The acquisitions had the following effect on the consolidated entity’s assets and liabilities:Carrying Fair value Recognisedamounts adjustments values$million $million $million

Cash and cash equivalents 19.6 – 19.6Trade and other receivables 7.8 – 7.8Inventories 2.2 1.9 4.1Exploration and evaluation assets 29.6 – 29.6Oil and gas assets 706.7 (14.2) 692.5Deferred tax assets 28.6 0.2 28.8Trade and other payables (41.8) – (41.8)Interest-bearing loans and borrowings (154.7) – (154.7)Provisions (26.9) – (26.9)

Net identifiable assets and liabilities 571.1 (12.1) 559.0

Cash paid 552.5Acquisition costs 6.5

Total consideration 559.0Cash acquired (19.6)Payment made relating to 2004 acquisition 16.7

Net cash outflow 556.1


110


26. Interests in Joint Ventures

(a) Santos Ltd and its controlled entities have combined interests in unincorporated joint ventures in the following major areas:Average interest

Joint venture/area Principal activities %

Amadeus BasinMereenie Oil and gas production 65Mereenie Pipeline Oil transportation 65Palm Valley Gas production 48

Browse Basin Oil and gas exploration 70Carnarvon Basin Oil and gas exploration and production 34Cooper Basin Downstream Liquid hydrocarbon transportation and processing 65Cooper Basin Unit

South Australia Oil and gas production 65Queensland Oil and gas production 60

Cooper/Eromanga BasinsSouth Australia Oil and gas exploration and production 67Queensland, ATP 259P Oil and gas exploration and production 60Other Eromanga Oil and gas exploration and production 74Jackson Moonie Pipeline Oil transportation 83

Eastern QueenslandBowen Basin Gas exploration and production 58Surat Basin Oil and gas exploration and production 50

EgyptGulf of Suez Oil and gas exploration 50

Gippsland Basin Oil and gas exploration and production 35Indonesia

East Java Basin Oil and gas exploration and production 42Kutei Basin Oil and gas exploration 35West Natuna Basin Oil and gas exploration and production 9West Papua Oil and gas exploration 20

Offshore Northern AustraliaBonaparte Basin Oil and gas exploration 95Houtman Basin Oil and gas exploration 33Timor Gap Oil and gas exploration and production 17Timor Sea Oil and gas exploration and production 25

Otway Basin Oil and gas exploration and production 36Papua New Guinea

PDL1 (Part Hides Field) Oil and gas exploration 31Other interests Oil and gas exploration and production 34

Sorell Basin Oil and gas exploration 58USA

Gulf Coast Oil and gas exploration and production 31Rocky Mountains Oil and gas exploration and production 32

Annual Report 2005




26. Interests in Joint Ventures (continued) $million $million $million $million

(b) The consolidated entity’s interest in assets employed in unincorporated joint ventures are included in the balance sheet under the following asset categories:

Current assetsCash and cash equivalents 113.2 87.2 33.0 32.2Trade and other receivables 34.9 32.1 12.0 8.5Inventories 22.2 18.6 11.8 13.5

Total current assets 170.3 137.9 56.8 54.2

Non-current assetsExploration and evaluation assets 130.9 78.6 7.2 6.3Oil and gas assets 4,105.1 3,423.6 1,727.4 1,138.2Other 1.5 1.2 – –

Total non-current assets 4,237.5 3,503.4 1,734.6 1,144.5

Total assets 4,407.8 3,641.3 1,791.4 1,198.7

(c) The amount of capital expenditure commitments, minimum exploration commitments and contingent liabilities in respect of unincorporated joint ventures are:

Capital expenditure commitments 214.3 266.9 90.8 102.1Minimum exploration commitments 169.5 172.5 48.8 71.5Contingent liabilities 15.2 13.4 4.0 6.1

27. Reconciliation of Cash Flows from Operating Activities

Profit after income tax 762.1 354.7 518.7 655.4Add/(deduct) non-cash items:

Depreciation and depletion 561.0 474.9 188.0 201.3Net impairment (reversal)/loss of investment in controlled entities – – (338.4) 9.5Exploration and evaluation expensed 204.2 117.4 31.5 46.0Net impairment reversal of oil and gas assets (131.3) (7.6) (50.5) (34.4)Foreign exchange debt hedging gains/(losses) (1.8) – 0.5 –Share-based payments expense 2.4 0.1 2.4 0.1Increase/(decrease) in income taxes payable 173.5 (18.1) (42.1) 12.4Net increase in deferred tax asset and deferred tax liability 41.5 26.2 30.7 29.6Tax benefit upon entering into Australian tax consolidation regime – (20.0) – (20.0)Borrowing costs capitalised (28.0) (32.1) – –Unwind of the effect of discounting on provisions 14.5 14.0 5.2 3.2Foreign currency fluctuations (81.9) (38.4) 5.1 (2.3)Net gain on sale of non-current assets (23.1) (61.2) (5.1) (336.8)Net gain on sale of controlled entities (16.3) – (15.1) –

Net cash provided by operating activities before changes in assets or liabilities 1,476.8 809.9 330.9 564.0Add/(deduct) change in operating assets or liabilities net of acquisitions of businesses:

Increase in receivables (151.2) (157.9) (107.7) (117.4)Increase in inventories (17.6) (1.7) (8.5) (5.6)Decrease/(increase) in other assets 10.5 (6.7) 5.2 0.7Increase/(decrease) in payables 135.1 (27.5) 51.2 (23.3)Increase/(decrease) in provisions 4.3 (11.1) (0.7) (25.7)

Net cash provided by operating activities 1,457.9 605.0 270.4 392.7


112


28. Key Management Personnel Disclosures

(a) Key management personnelKey management personnel are those persons having authority and responsibility for planning, directing and controlling the activities of theconsolidated entity and the Company, directly or indirectly, including the Directors of the Company.

The following were key management personnel of the consolidated entity and the Company at any time during the reporting period and unlessotherwise indicated were key management personnel for the entire period.

DirectorsName PositionBarnett, Peter Charles Non-executive DirectorDean, Kenneth Alfred Non-executive Director (appointed 23 February 2005)Ellice-Flint, John Charles Managing DirectorGerlach, Stephen Chairman and Non-executive DirectorHarding, Richard Michael Non-executive DirectorMcGregor, Graeme William Non-executive Director (resigned 30 September 2005)O’Leary, Michael Anthony Non-executive DirectorRecny, Christopher John Non-executive Director (appointed 23 February 2005)Sloan, Judith Non-executive DirectorExecutivesName PositionEames, Martyn Edward James Vice President – Corporate and PeopleGouadain, Jacques Elie Vice President – Geoscience and New VenturesMoore, Paul Derek Vice President – Development Projects and Technical Services (resigned 21 November 2005)Wasow, Peter Christopher Chief Financial OfficerWilkinson, Richard John Vice President – Gas Marketing and CommercialisationWood, Bruce James Vice President – Strategic ProjectsYoung, Jonathon Terence Executive Vice President – Operations

All Executives are employed by Santos Ltd.

(b) Key management personnel compensationThe Remuneration Committee of the Board is responsible for reviewing the compensation policies and practices of the Company including: thecompensation arrangements for the Managing Director and senior management; the Company’s superannuation arrangements; employeeshare and option plans; and the fees for Non-executive Directors.

Non-executive DirectorsIn setting fee levels, the Remuneration Committee, which makes recommendations to the Board, takes into account:

• independent professional advice;

• fees paid to Non-executive Directors by comparable companies;

• the general time commitment required from Non-executive Directors and the risks associated with discharging the duties attaching to therole of director;

• the level of personal responsibility undertaken by a Director; and

• the general commercial expertise, experiences and qualifications of the Directors.

Fee levels are set within the aggregate amount (being $1,500,000 per year) approved by shareholders at the Annual General Meeting of theCompany held on 7 May 2004. Non-executive Directors’ fees were increased effective 1 July 2004. Non-executive Directors, other than theChairman, who are members of Board committees receive additional fees. Non-executive Directors may not participate in any of the Company’sbonus, share or option plans.

Directors appointed after 1 January 2004 are not entitled to receive a benefit on retirement (other than statutory entitlements) as theCompany has ceased this practice.

Non-executive Directors appointed prior to 1 January 2004 are contractually entitled to receive a retirement benefit but the amount of thebenefit was “frozen” as at 30 June 2004. The benefit is payable upon ceasing to hold office as a director. The retirement payment (inclusive ofsuperannuation guarantee charge entitlements) is made pursuant to an agreement entered into with each Non-executive Director on termsapproved by shareholders at the 1989 Annual General Meeting. These benefits have been fully provided for by the Company. The Board hasdetermined that these Non-executive Directors may take all or part of their fixed entitlement in the form of a Company contribution into theirown nominated superannuation funds.

Annual Report 2005



28. Key Management Personnel Disclosures (continued)

(b) Key management personnel compensation (continued)

Executive DirectorThe Managing Director, Mr J C Ellice-Flint, is currently the only Executive Director.

The structure of the current year’s remuneration package for the Managing Director, Mr J C Ellice-Flint, was agreed at the time of entering intohis executive service agreement in December 2000 in order to recruit him and to, in part, compensate him for some of the benefits he gave upin leaving his previous employment.

Mr J C Ellice-Flint has an executive service agreement with the Company which continues until terminated by either party in accordance withthe agreement.

His compensation comprises a base salary reviewed annually and an annual bonus potential of between 0% and 150% of his fixedremuneration calculated on a formula that includes components to measure the growth of profitability, exploitable reserves and share price.

On 13 December 2000, Mr J C Ellice-Flint was granted 1,000,000 Restricted Shares. These shares were granted to him at no cost at the time ofhis appointment as Chief Executive Officer as part of the total package required to attract Mr J C Ellice-Flint from the senior position he hadheld previously. No performance conditions were attached to the shares and legal title in them passed to Mr J C Ellice-Flint upon hiscompletion of five years of service with Santos on 12 December 2005. Further details regarding the Restricted Shares are set out in note 19 tothe financial statements.

In addition, as Mr J C Ellice-Flint gave up his right to a sizeable potential US pension entitlement to join the Company, the Company has beencontributing an actuarially determined amount into the Company’s superannuation fund to provide for Mr J C Ellice-Flint’s superannuationbenefits. While he was entitled to a much lower accrued benefit until 7 February 2006 (his 55th birthday), under the arrangement his benefitwas to change to a defined multiple of fixed remuneration after that date to recognise his five years service and to provide a “make up”superannuation benefit. This arrangement however is currently being reviewed in conjunction with a review of his total remunerativearrangements.

Mr J C Ellice-Flint was also granted options, each to acquire a fully paid ordinary share in the Company. The exercise price of the options wasset at the time of his appointment in 2000 at $5.83, and vesting of the third and final tranche of 1,000,000 options was subject to thesatisfaction of performance conditions, which were tested during 2005. These options were provided essentially on the same terms as thoseissued to other senior executives under the Santos Executive Share Option Plan.

If the Company terminates Mr J C Ellice-Flint’s appointment without cause, the Company may at its option, in lieu of part or all of the noticeperiod of 24 months, pay to him an amount equal to a proportion or multiple of his annual base salary and the current year’s potential bonus(excluding the application of any performance condition) at the time at which notice is given.

Senior ExecutivesRemuneration objectives and principlesThe objectives of the Company’s compensation policy are to attract, retain and motivate appropriately qualified and experienced executivescapable of discharging their respective responsibilities to enable the Company to achieve its business strategy.

The principles underlying the compensation policy are: to realistically reflect the responsibilities of executives and other employees; to beindustry competitive and reasonable; that a significant portion of compensation be at risk against individual and company performance andshareholder wealth creation; that performance, not failure, be rewarded so that the Company’s best performers receive more; and toencourage executives to manage from the perspective of the shareholders by rewarding them for aligning Company and shareholder returns.

Compensation structureThe Company’s compensation structure for its non-award employees is based upon Target Total Remuneration (“TTR”), the components ofwhich comprise:

• a fixed component called Total Fixed Remuneration (“TFR”); and

two variable components, called:

• the Short-term Incentive (“STI”) and

• the Long-term Incentive (“LTI”).

TFR comprises salary, superannuation and benefits; is quantified by reference to role and experience; and is industry benchmarked.

STI is represented as a percentage of base remuneration which is “at risk”, consists of an annual cash bonus paid to reward performance basedon a mix of company performance and individual performance measured against annual scorecards with target and stretch performancecriteria determined in advance each year.

The STI is designed to put a proportion of each executive’s annual remuneration at risk against meeting targets linked to the Company’sannual business objectives, thereby driving both individual and Company performance.

For the specified executives, 70% of the STI is based on Company performance, and the remaining 30% is based on individual performance.For other executives, 50% of the STI is based on Company performance, and the other 50% is based on individual performance.


114



(b) Key management personnel compensation (continued)Company performance is assessed on a range of metrics covering reserves growth, reserve replacement cost, production, margin, new growthoptions, shareholder value creation, people, environment, health, safety and continuous improvement. Individual performance is assessedagainst targets set within each executive’s area of responsibility.

Each metric is assessed against target and assigned a score on a five-point scale. The average of the scores of each metric is used to quantify abonus pool expressed as a percentage of the sum of maximum bonuses of all eligible employees. The bonus pool may be adjusted after takinginto consideration other factors not reflected in the metrics but deemed relative to Company performance.

LTI in relation to executive compensation includes a long-term performance-based component in the form of equity participation through theSantos Executive Share Option Plan (“SESOP”) and the Santos Employee Share Purchase Plan (“SESPP”). Participation is determined by theBoard, on recommendation of the Remuneration Committee, and only applies to executives who are in a position to affect shareholder returns.

Options and rights to shares issued under these Plans to senior executives are linked to the longer term performance of the Company and areonly exercisable following the satisfaction of performance hurdles that are designed to maximise shareholder wealth.

The amount of the award, and correspondingly the proportion of remuneration at risk, varies between executives according to their respectivelevels of seniority and responsibility.

The rules of the SESPP and SESOP were both approved by shareholders in 1997 and again in 2000.

Having regard to contemporary best practice, the LTI program is designed to drive superior executive performance and to reward only superiorCompany performance, linked to an appropriate performance benchmark. The benchmark assesses actual Company performance in terms oflong-term comparative growth of the Company and resulting shareholder value.

Company performance is measured over a three-year period based on the Company’s Total Shareholder Return (“TSR”) relative to one or morecomparator groups as determined by the Board at the commencement of the performance period including, without limitation, anycombination of the ASX100, energy companies in ASX100, the ASX Energy Index and international exploration and production companies. For2005, these were:

• BG Group PLC

• Burlington Resources Inc

• Devon Energy Corporation

• Canadian Natural Resources Limited

• Anadarko Petroleum Corporation

• Apache Corporation

• Unocal Corporation

• Woodside Petroleum Limited

• EOG Resources Inc

• Talisman Energy Inc

• XTO Energy Inc

• Nexan Inc

• Chesapeake Energy Corporation

• Murphy Oil Corporation

• Noble Energy Inc

• Newfield Exploration Co

• Oil Search Limited

• Hardman Resources Limited

• Australian Worldwide Exploration Limited

Annual Report 2005




(b) Key management personnel compensation (continued)If performance is below the 50th percentile, no award is made. A proportionate award is made for performance between the 50th and 75thpercentile, and the maximum award is made for performance at or above the 75th percentile.

In relation to the current financial year, awards may be taken in the form of rights over shares pursuant to SESPP or, at the election of anexecutive, options pursuant to SESOP, details of which are described in note 19(c)(ii) to the financial statements. In the previous period,awards could only be taken in the form of shares pursuant to SESPP or options granted under SESOP, at the election of executives.

Rights to shares and options are granted at no cost to the executives with the number of shares awarded being determined by dividing theamount of the award by the volume weighted average price of the Company’s shares over the five business days up to and including the awarddate. The number of options awarded is of equivalent value calculated by an independent expert based on an acceptable valuation method.

The exercise price of the options is the volume weighted average price of the Company’s shares over the five business days up to and includingthe award date.

The Board intends that LTI awards be made on an annual basis using a three-year measurement period for the applicable performance hurdles.However, the Board reserves the right to suspend or modify the LTI program in light of circumstances appropriate to the Company from timeto time.

The maximum number of shares that may be issued under all of the Company’s executive and employee share and option plans cannot exceedthe limit of 5% of the issued capital, as approved by shareholders at the 2000 Annual General Meeting.

The executives are entitled to a termination payment in the event of termination of their service agreement by the Company without cause.They are entitled to three months’ notice, excepting for Mr P C Wasow who is entitled to six months’ notice, or payment in lieu of that notice,plus three weeks for each year of continuous service, pro-rata for part thereof, and capped at a maximum of 65 weeks of total fixedremuneration, less notional value of superannuation for that period.


116


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915

25,8

68–

–14

5,99

2–

–65

1,14

5Yo

ung,

Jon

atho

n Te

renc

e54

9,61

3–

424,

900

5,91

511

,585

–32

2,14

0–

––

1,31

4,15

3

Tota

l5,

180,

962

96,1

533,

073,

400

46,6

8854

5,80

2–

1,39

1,69

820

3,49

2–

41,5

4710

,579

,742

1Su

pera

nnua

tion

con

trib

utio

ns m

ade

on b

ehal

f of

Non

-exe

cutive

Dire

ctor

s to

sat

isfy

the

Com

pany

’s ob

ligat

ions

und

er a

pplic

able

Sup

eran

nuat

ion

Guar

ante

e Ch

arge

legi

slat

ion.

2M

r K

Dean

and

Mr

C Re

cny

join

ed t

he B

oard

on

23 F

ebru

ary

2005

.3

Mr

G M

cGre

gor

retire

d fr

om t

he B

oard

on

30 S

epte

mbe

r 20

05.

4In

clud

es t

he c

ost

of c

ar p

arki

ng p

rovi

ded

in t

he C

ompa

ny’s

head

off

ice

in A

dela

ide.

5In

acc

orda

nce

with

the

requ

irem

ents

of

the

Acco

unting

Sta

ndar

ds,

rem

uner

atio

n in

clud

es a

pro

port

ion

of t

he n

otio

nal v

alue

of

equi

ty c

ompe

nsat

ion

gran

ted

or o

utst

andi

ng d

urin

g th

e ye

ar.

The

notion

al v

alue

of

equi

ty in

stru

men

ts w

hich

do

not

vest

dur

ing

the

repo

rtin

g pe

riod

is d

eter

min

ed a

s at

the

gra

nt d

ate

and

is p

rogr

essi

vely

allo

cate

d ov

er t

he v

esting

per

iod.

The

am

ount

incl

uded

as

rem

uner

atio

n is

not

rel

ated

to

or in

dica

tive

of

the

bene

fit (

if an

y) t

hat

indi

vidu

al e

xecu

tive

s m

ay u

ltim

atel

y re

alis

e sh

ould

the

equ

ity

inst

rum

ents

ves

t. T

he n

otio

nal v

alue

of

SARs

and

opt

ions

as

atth

e da

te o

f th

eir

gran

t ha

s be

en d

eter

min

ed in

acc

orda

nce

with

AASB

124

“Re

late

d Pa

rty

Disc

losu

res”

app

lyin

g th

e M

onte

Car

lo v

alua

tion

met

hod.

Det

ails

of

the

assu

mpt

ions

und

erly

ing

the

valu

atio

nar

e se

t ou

t in

not

e 19

to

the

finan

cial

sta

tem

ents

.6

The

Man

agin

g Di

rect

or w

as g

rant

ed o

ptio

ns a

t th

e tim

e hi

s em

ploy

men

t w

ith

the

Com

pany

com

men

ced.

In

resp

ect

of s

enio

r ex

ecut

ives

, a

rang

e of

20%

– 2

3% o

f ea

ch e

xecu

tive

’s re

mun

erat

ion

for

the

finan

cial

yea

r co

nsis

ts o

f gr

ants

of

SARs

or

option

s.7

The

tota

l num

ber

of S

ARs

and

option

s gr

ante

d in

200

5 re

pres

ent

thre

e se

para

te g

rant

s at

the

sam

e tim

e. W

hile

one

of

the

thre

e w

as t

he n

orm

al g

rant

for

200

5, t

he o

ther

tw

o w

ere

nece

ssar

y as

cat

ch-

ups

for

the

gran

ts t

hat

wou

ld o

rdin

arily

hav

e ta

ken

plac

e in

200

3 an

d 20

04.

The

reas

on t

hese

gra

nts

did

not

take

pla

ce a

t th

e ap

prop

riate

tim

e w

as d

ue t

o th

e su

spen

sion

of

the

LTI

prog

ram

to

enab

le a

tho

roug

h re

view

of

its

desi

gn,

whi

ch w

as c

ompl

eted

in la

te 2

004.

8M

r P

Moo

re c

ease

d em

ploy

men

t w

ith

the

Com

pany

on

21 N

ovem

ber

2005

and

his

53,

100

SARs

, at

the

val

ue o

f $2

19,3

03,

laps

ed.

9Ea

ch o

f th

e No

n-ex

ecut

ive

Dire

ctor

s re

ceiv

es f

ees

and

no s

alar

y.

Annual Report 2005



28. K

ey M

anag

emen

t Per

sonn

el D

iscl

osur

es (

cont

inue

d)

(b)

Key

man

agem

ent p

erso

nnel

com

pens

atio

n (c

onti

nued

)

2004

Shor

t-te

rm e

mpl

oyee

ben

efit

sPo

st e

mpl

oym

ent

Shar

e-ba

sed

paym

ents

6,7

Othe

r Fe

es/

Com

mit

tee

Supe

r-lo

ng-t

erm

Nam

esa

lary

9fe

esST

IOt

her5

annu

atio

n1Re

tire

men

t2SA

RsOp

tion

sbe

nefi

tsTe

rmin

atio

nTo

tal

$$

$$

$$

$$

$$

$

Dire

ctor

sBa

rnet

t, P

eter

Cha

rles

95,0

0015

,500

––

9,94

515

,569

––

––

136,

014

Conr

oy, F

ranc

is J

ohn4

90,0

4114

,689

––

9,42

515

,927

––

––

130,

082

Ellic

e-Fl

int,

Joh

n Ch

arle

s1,

050,

000

–1,

300,

000

5,39

927

4,56

9–

–27

4,32

6–

–2,

904,

294

Gerl

ach,

Ste

phen

285,

000

––

31,1

673

11,2

93–

––

––

327,

460

Har

ding

, Ric

hard

Mic

hael

91,6

671,

000

––

5,04

0–

––

––

97,7

07M

cGre

gor,

Grae

me

Will

iam

95,0

0020

,500

––

10,1

5715

,716

––

––

141,

373

O’Le

ary,

Mic

hael

Ant

hony

95,0

009,

000

––

9,36

016

,842

––

––

130,

202

Sloa

n, J

udit

h95

,000

19,7

50–

–10

,090

15,4

03–

––

–14

0,24

3Ex

ecut

ives

Eam

es, M

arty

n Ed

war

d Ja

mes

850

,715

––

444

3,28

6–

––

––

54,4

45Go

uada

in, J

acqu

es E

lie37

1,32

7–

176,

600

30,9

1229

,132

–58

,939

18,7

31–

–68

5,64

1M

oore

, Pau

l Der

ek31

1,73

4–

140,

600

27,3

9932

,657

–58

,819

15,6

74–

–58

6,88

3W

asow

, Pet

er C

hris

toph

er44

4,38

9–

307,

200

5,39

949

,361

–79

,052

20,0

00–

–90

5,40

1W

ilkin

son,

Ric

hard

Joh

n31

1,87

5–

169,

800

5,39

927

,428

–62

,341

––

–57

6,84

3W

ood,

Bru

ce J

ames

312,

596

–12

8,20

05,

399

23,5

81–

18,9

0040

,583

––

529,

259

Youn

g, J

onat

hon

Tere

nce

486,

306

–31

6,50

05,

399

50,2

63–

83,4

4330

,833

––

972,

744

Tota

l4,

185,

650

80,4

392,

538,

900

116,

917

555,

587

79,4

5736

1,49

440

0,14

7–

–8,

318,

591

1Su

pera

nnua

tion

con

trib

utio

ns m

ade

on b

ehal

f of

Non

-exe

cutive

Dire

ctor

s to

sat

isfy

the

Com

pany

’s ob

ligat

ions

und

er a

pplic

able

Sup

eran

nuat

ion

Guar

ante

e Ch

arge

legi

slat

ion.

2Th

is s

how

s pr

ovis

ions

mad

e in

acc

orda

nce

with

arra

ngem

ents

pre

viou

sly

appr

oved

by

shar

ehol

ders

, w

hich

am

ount

s ha

d be

en f

ully

pro

vide

d fo

r.3

Paym

ent

rela

ted

to a

leas

ing

arra

ngem

ent

for

a m

otor

veh

icle

, w

hich

arran

gem

ent

was

ter

min

ated

on

30 J

une

2004

.4

Upon

his

ret

irem

ent

as a

Dire

ctor

on

14 D

ecem

ber

2004

, M

r F

Conr

oy b

ecam

e en

title

d to

a r

etire

men

t pa

ymen

t of

$16

1,44

7 in

acc

orda

nce

with

arra

ngem

ents

pre

viou

sly

appr

oved

by

shar

ehol

ders

. On

ly$1

5,92

7 of

thi

s am

ount

had

bee

n di

sclo

sed

as p

art

of M

r Co

nroy

’s re

mun

erat

ion

for

the

2004

rep

orting

per

iod,

as

the

bala

nce

of t

he p

aym

ent

had

been

pro

vide

d fo

r in

pre

viou

s re

port

ing

perio

ds.

5In

clud

es t

he c

ost

of c

ar p

arki

ng p

rovi

ded

in t

he C

ompa

ny’s

head

off

ice

in A

dela

ide

(exc

ludi

ng N

on-e

xecu

tive

Dire

ctor

s).

6In

acc

orda

nce

with

the

requ

irem

ents

of

the

Acco

unting

Sta

ndar

ds,

rem

uner

atio

n in

clud

es a

pro

port

ion

of t

he n

otio

nal v

alue

of

equi

ty c

ompe

nsat

ion

gran

ted

or o

utst

andi

ng d

urin

g th

e ye

ar.

The

notion

al v

alue

of

equi

ty in

stru

men

ts w

hich

do

not

vest

dur

ing

the

repo

rtin

g pe

riod

is d

eter

min

ed a

s at

the

gra

nt d

ate

and

is p

rogr

essi

vely

allo

cate

d ov

er t

he v

esting

per

iod.

The

am

ount

incl

uded

as

rem

uner

atio

n is

not

rela

ted

to o

r in

dica

tive

of

the

bene

fit (

if an

y) t

hat

indi

vidu

al e

xecu

tive

s m

ay u

ltim

atel

y re

alis

e sh

ould

the

equ

ity

inst

rum

ents

ves

t. T

he n

otio

nal v

alue

of

shar

es a

nd o

ptio

ns a

s at

the

date

of

thei

r gr

ant

has

been

det

erm

ined

in a

ccor

danc

e w

ith

AASB

124

“Re

late

d Pa

rty

Disc

losu

res”

app

lyin

g th

e m

odifi

ed B

lack

-Sch

oles

or

Bino

mia

l opt

ion

pric

ing

mod

el.

Deta

ils o

f th

e as

sum

ptio

nsun

derly

ing

the

valu

atio

n ar

e se

t ou

t in

not

e 19

to

the

finan

cial

sta

tem

ents

.7

The

Man

agin

g Di

rect

or w

as g

rant

ed o

ptio

ns a

t th

e tim

e hi

s em

ploy

men

t w

ith

the

Com

pany

com

men

ced.

In

resp

ect

of s

enio

r ex

ecut

ives

, 20

% –

23%

of

each

exe

cutive

’s re

mun

erat

ion

for

the

finan

cial

year

con

sist

s of

gra

nts

of s

hare

s or

opt

ions

.8

Mr

M E

ames

was

app

oint

ed o

n 1

Dece

mbe

r 20

04.

9Ea

ch o

f th

e No

n-ex

ecut

ive

Dire

ctor

s re

ceiv

es f

ees

and

no s

alar

y.


118



(b) Key management personnel compensation (continued)The relative proportion of the Managing Director’s and senior executives’ total remuneration packages that is performance-based is set out inthe table below:

% of total remuneration (annualised)Fixed Performance-based

remuneration remunerationTFR STI LTI

Managing Director1 44% 56% 0%2

Executive VP Operations 52% 27% 21%Chief Financial Officer 52% 27% 21%Other specified Executives 57% 20% 23%Other senior Executives 66% 14% 20%1 On appointment the Managing Director was granted 1,000,000 Restricted Shares subject to completion of a service condition. The Managing Director is

also entitled to an annual bonus depending upon performance measured in terms of growth of profitability, exploitable reserves and share price.2 At the time of the Managing Director’s appointment in 2000 he was granted 3,000,000 options in three tranches each of 1,000,000 options at an

exercise price of $5.83 per option. As the grant date preceded 7 November 2002 no value is attributed to them for 2005 in accordance with AASB 1“First-time Adoption of Australian Equivalents to International Financial Reporting Standards”.

Annual Report 2005



28. K

ey M

anag

emen

t Per

sonn

el D

iscl

osur

es (

cont

inue

d)

(c)

Equi

ty in

stru

men

tsRi

ghts

and

opt

ions

hol

ding

sTh

e m

ovem

ent d

urin

g th

e re

port

ing

peri

od in

the

num

ber o

f rig

hts

and

opti

ons

over

ord

inar

y sh

ares

of t

he C

ompa

ny h

eld

dire

ctly

, ind

irec

tly

or b

enef

icia

lly, b

y ea

ch k

eym

anag

emen

t per

son,

incl

udin

g th

eir r

elat

ed p

arti

es, i

s as

follo

ws:

Vest

edM

arke

tVe

sted

and

but n

otBa

lanc

e at

pric

e at

Bala

nce

Vest

edVe

sted

exer

cisa

ble

exer

cisa

ble

begi

nnin

gDa

teda

te o

fOt

her

at e

nd o

fdu

ring

at e

nd o

fat

end

of

at e

nd o

fNa

me

of th

e ye

arGr

ante

d2Ex

erci

sed3,

4ex

erci

sed

exer

cise

3ch

ange

s5th

e ye

arth

e ye

arth

e ye

arth

e ye

arth

e ye

ar

Dire

ctor

sEl

lice-

Flin

t, J

ohn

Char

les1

3,00

0,00

0–

(2,0

00,0

00)

2 M

ar 2

005

8.66

––

1,00

0,00

0–

––

(1,0

00,0

00)

2 Se

p 20

0511

.52

Exec

utiv

esEa

mes

, Mar

tyn

Edw

ard

Jam

es–

69,6

00–

–69

,600

––

––

Goua

dain

, Jac

ques

Elie

200,

000

60,0

00–

–26

0,00

020

,000

220,

000

220,

000

–M

oore

, Pau

l Der

ek12

5,00

053

,100

(125

,000

)19

Aug

2005

11.0

0(5

3,10

0)–

100,

000

––

–W

asow

, Pet

er C

hris

toph

er15

0,00

070

,800

(150

,000

)30

Aug

2005

11.5

2–

70,8

0017

3,60

023

,600

23,6

00–

Wilk

inso

n, R

icha

rd J

ohn

–53

,100

––

53,1

0017

,700

17,7

0017

,700

–W

ood,

Bru

ce J

ames

95,0

8516

5,90

0(5

0,00

0)1

Sep

2005

11.5

1–

210,

985

50,0

0045

,085

45,0

85–

Youn

g, J

onat

hon

Tere

nce

250,

000

78,0

00(2

50,0

00)

5 Se

p 20

0511

.15

–78

,000

276,

000

26,0

0026

,000

–1

3,00

0,00

0 op

tions

wer

e gr

ante

d to

Mr

J El

lice-

Flin

t on

his

app

oint

men

t. T

he p

erfo

rman

ce c

ondi

tions

app

licab

le t

o th

e op

tions

wer

e ba

sed

on a

chie

ving

a 1

0% T

SR g

row

th o

ver

the

perfo

rman

ce p

erio

dap

plic

able

to

each

tra

nche

of

optio

ns.

Tran

ches

1 a

nd 2

of

the

optio

ns s

atis

fied

the

perfo

rman

ce c

ondi

tions

in p

revi

ous

finan

cial

yea

rs a

nd w

ere

exer

cise

d on

2 M

arch

200

5. D

urin

g th

e cu

rrent

rep

ortin

gpe

riod,

the

per

form

ance

con

ditio

n ap

plyi

ng t

o Tr

anch

e 3

was

sat

isfie

d an

d th

e op

tions

wer

e ex

erci

sed

on 2

Sep

tem

ber

2005

. As

all

optio

ns h

ave

been

exe

rcis

ed t

here

are

no

optio

ns r

emai

ning

.2

The

aggr

egat

e va

lue

of S

ARs

and

optio

ns g

rant

ed d

urin

g th

e ye

ar (

as a

t th

e da

te o

f th

eir gr

ant)

is $

1,59

5,19

0. F

urth

er d

etai

ls of

the

res

pect

ive

valu

atio

ns o

f th

e SA

Rs a

nd o

ptio

ns a

re s

et o

ut in

not

e 19

.3

The

valu

e of

an

optio

n on

the

dat

e of

exe

rcis

e is

the

mar

ket

pric

e of

a s

hare

in t

he C

ompa

ny o

n th

at d

ate.

Acc

ordi

ngly,

the

agg

rega

te v

alue

of

optio

ns e

xerc

ised

dur

ing

the

finan

cial

yea

r w

as$3

5,30

6,00

0.4

No S

ARs

wer

e ex

erci

sed

durin

g 20

05.

5Du

ring

the

year

, th

e rig

ht t

o 53

,100

SAR

s he

ld b

y M

r P

Moo

re w

ere

forf

eite

d on

his

res

igna

tion

on 2

1 No

vem

ber

2005

. No

opt

ions

wer

e fo

rfei

ted

durin

g th

e re

port

ing

perio

d. T

he v

alue

of

a SA

R or

opt

ion

on t

he d

ay it

laps

es o

r is

for

feited

is n

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120



(c) Equity instruments (continued)

Share holdingsThe movement during the reporting period in the number of shares of the Company held directly, indirectly or beneficially, by each keymanagement person, including their related parties, is as follows:

Balance heldBalance at Received on Balance nominallybeginning Granted as exercise Other at end at end

Name of the year compensation of options Redeemed changes of the year of the year

DirectorsOrdinary shares – fully paid

Barnett, Peter Charles 12,394 – – – – 12,394 –Dean, Kenneth Alfred – – – – 3,000 3,000 –Ellice-Flint, John Charles 1,037,210 – 3,000,000 – 5,033 4,042,243 –Gerlach, Stephen 42,305 – – – 1,551 43,856 –Harding, Richard Michael – – – – – – –McGregor, Graeme William* 10,000 – – – – 10,000 –O’Leary, Michael Anthony 4,725 – – – 173 4,898 –Recny, Christopher John – – – – – – –Sloan, Judith 5,000 – – – – 5,000 –

Redeemable convertible preference sharesEllice-Flint, John Charles 225 – – – – 225 –McGregor, Graeme William* 1,200 – – – – 1,200 –Sloan, Judith 195 – – – – 195 –

* Mr G McGregor resigned as Director on 30 September 2005.

ExecutivesOrdinary shares – fully paid

Eames, Martyn Edward James – – – – – – –Gouadain, Jacques Elie 12,216 – – – – 12,216 –Moore, Paul Derek* 12,025 – 125,000 – (137,025) – –Wasow, Peter Christopher 16,134 – 150,000 – (150,000) 16,134 –Wilkinson, Richard John 12,591 – – – – 12,591 –Wood, Bruce James 6,439 – 50,000 – 851 57,290 –Young, Jonathon Terence 17,183 – 250,000 – – 267,183 –

* Mr P Moore resigned on 21 November 2005.

(d) LoansThere have been no loans made, guaranteed or secured, directly or indirectly, by the consolidated entity or any of its subsidiaries at any timethroughout the year with any key management person, including their related parties.

Annual Report 2005



29. Related Parties

Identity of related partiesSantos Ltd and its controlled entities engage in a variety of related party transactions in the ordinary course of business. These transactions areconducted on normal terms and conditions.

Details of related party transactions and amounts are set out in:

Note 5 as to interest received from/paid to controlled entities;

Note 8 as to tax related balances and other amounts owing by controlled entities;

Notes 17 and 18 as to amounts owing to controlled entities;

Note 18 as to guarantees by Santos Ltd of the financing facilities of controlled entities;

Note 20 as to Non-executive Directors’ retirement benefits;

Notes 15 and 24 as to investments in controlled entities;

Note 26 as to interests in joint ventures; and

Note 28 as to disclosures relating to key management personnel.

Other related party transactionsMr J W McArdle, who retired as a Director on 14 July 2001, entered into a consultancy agreement with the Company pursuant to which he willprovide consultancy services to the consolidated entity. The amount paid pursuant to this agreement during the financial year was $85,000(2004: $55,000). This transaction occurred on terms no more favourable than would have been adopted if dealing at arm’s length, does not havethe potential to adversely affect decisions about the allocation of scarce resources and is trivial in nature.


30. Remuneration of Auditors $000 $000 $000 $000

Amounts received or due and receivable by the auditors of Santos Ltd for:External audit services 1,091 715 360 443Other services:

Taxation – 147 – –Due diligence – 3 – 3Other 12 9 6 6

1,103 874 366 452

Amounts received or due and receivable by other auditors:External audit services 77 – – –

The auditors ceased providing taxation services from 31 December 2004.


122


31. Segment Information

Segment results, assets and liabilities include items directly attributable to a segment as well as those that can be allocated on a reasonable basis.Unallocated items mainly comprise dividend revenue, interest-earning assets and revenue, interest-bearing loans, borrowings and expenses, andcorporate assets and liabilities.Segment capital expenditure is the total cost incurred during the period to acquire segment assets that are expected to be used for more thanone period.

Geographic segmentsThe consolidated entity operates primarily in Australia but also has international operations in the United States, Papua New Guinea, Indonesiaand Egypt.

Australia International Consolidated2005 2004 2005 2004 2005 2004


Primary reportingGeographic segmentsRevenueTotal segment revenue 2,303.5 1,400.5 172.3 114.7 2,475.8 1,515.2Other unallocated revenue 0.1 –

Total revenue 2,475.9 1,515.2

ResultsEarnings before interest, tax and significant items 1,184.5 526.4 83.7 14.8 1,268.2 541.2Significant items:

Insurance recovery 33.9 116.6 – – 33.9 116.6Costs associated with Moomba liquids recovery

plant fire – (17.5) – – – (17.5)Profit on sale of oil and gas assets 34.5 54.3 0.2 6.8 34.7 61.1Exploration and evaluation expensed (66.7) (61.2) (137.5) (56.2) (204.2) (117.4)Net impairment reversal/(loss) of oil and gas assets 130.6 28.8 0.7 (21.2) 131.3 7.6Organisation restructure costs (5.2) (21.6) – – (5.2) (21.6)Accelerated depreciation due to East Spar shut-in (18.5) – – – (18.5) –

1,293.1 625.8 (52.9) (55.8) 1,240.2 570.0Unallocated corporate expenses (35.4) (3.6)

Earnings before interest and tax 1,204.8 566.4Unallocated net financing costs (71.3) (47.6)

Profit before income tax expense 1,133.5 518.8Income tax expense (371.4) (164.1)

Net profit after income tax attributable to the shareholders of Santos Ltd 762.1 354.7

Non-cash expensesDepreciation and depletion 493.2 388.1 51.9 72.4 545.1 460.5Unallocated corporate depreciation and depletion 15.9 14.4

Total depreciation and depletion 561.0 474.9

Exploration and evaluation expensed 66.7 61.2 137.5 56.2 204.2 117.4Net impairment (reversal)/loss of oil and gas assets (130.6) (28.8) (0.7) 21.2 (131.3) (7.6)

Total non-cash expenses 633.9 584.7

Annual Report 2005



Australia International Consolidated2005 2004 2005 2004 2005 2004

31. Segment Information (continued) $million $million $million $million $million $million

Primary reporting (continued)Geographic segments (continued)Acquisition of non-current assetsControlled entities 519.4 92.2 20.0 35.1 539.4 127.3Oil and gas assets, property, plant and equipment 701.1 773.2 250.6 146.4 951.7 919.6Unallocated corporate acquisition of oil and gas assets,

property, plant and equipment 23.6 10.4

Total acquisition of non-current assets 1,514.7 1,057.3

AssetsSegment assets 5,243.3 4,193.1 521.0 454.0 5,764.3 4,647.1Unallocated corporate assets 427.0 189.5

Consolidated total assets 6,191.3 4,836.6

LiabilitiesSegment liabilities 924.7 952.4 143.1 158.9 1,067.8 1,111.3Unallocated corporate liabilities 2,159.5 1,367.5

Consolidated total liabilities 3,227.3 2,478.8

Secondary reportingBusiness segmentsThe consolidated entity operates predominantly in one business, namely the exploration, development, production, transportation and marketingof hydrocarbons. Revenue is derived from the sale of gas and liquid hydrocarbons and the transportation of crude oil.


124



32. Commitments for Expenditure $million $million $million $million

The consolidated entity has the following commitments for expenditure:

(a) Capital commitmentsCapital expenditure contracted for at balance date for which no amounts have been provided in the financial statements:

Not later than one year 78.8 253.5 37.6 93.9Later than one year but not later than five years 135.5 13.4 53.2 8.2Later than five years – – – –

214.3 266.9 90.8 102.1

Santos Ltd has guaranteed the capital commitments of certain controlled entities (refer note 33 for further details).

(b) Minimum exploration commitmentsMinimum exploration commitments for which no amounts have been provided in thefinancial statement or capital commitments:

Not later than one year 63.8 42.1 6.8 10.3Later than one year but not later than five years 105.2 118.8 42.0 61.2Later than five years 0.5 11.6 – –

169.5 172.5 48.8 71.5

The consolidated entity has certain obligations to perform minimum exploration work and expend minimum amounts of money pursuant to the terms of the granting of petroleum exploration permits in order to maintain rights of tenure. These commitments may be varied as a result of renegotiations of the terms of the exploration permits, licences or contracts or alternatively upon their relinquishment. The minimum exploration commitments are less than the normal level of exploration expenditures expected to be undertaken by Santos Ltd and its controlled entities.

(c) Lease commitmentsNon-cancellable operating lease rentals are payable as follows:

Not later than one year 38.9 54.7 32.9 8.4Later than one year but not later than five years 105.9 102.9 103.7 21.1Later than five years 42.0 0.1 41.8 –

186.8 157.7 178.4 29.5

The consolidated entity leases floating production, storage and offtake (“FPSO”) facilities at four of its producing fields and leases buildingoffice space under operating leases. The FPSO leases typically run for a period of five to seven years. Building office space leases are for tenyears. Both have an option to renew the lease after that date. Lease payments generally increase every year based on various indices andfactors. None of the leases include contingent rentals.During the year ended 31 December 2005 $53.2 million (2004: $38.9 million) was recognised as an expense in the income statement inrespect of operating leases.

Annual Report 2005




33. Contingent Liabilities $million $million $million $million

The Directors are of the opinion that provisions are not required in respect of these matters, as it is not probable that a future sacrifice of economic benefits will be required or the amount is not capable of reliable measurement.Santos Ltd and its controlled entities have the following contingent liabilities arising in respect of:

Performance guarantees 22.5 9.8 12.4 6.3Litigation and proceedings 8.2 8.1 3.5 2.3

30.7 17.9 15.9 8.6

Legal advice in relation to the litigation and proceedings referred to above indicates that on the basis of available information, any liability inrespect of these claims is unlikely to exceed $2.8 million on a consolidated basis.

A number of the Australian interests of the consolidated entity are located within areas the subject of one or more claims or applications for nativetitle determination. Whatever the outcome of those claims or applications, it is not believed that they will significantly impact the consolidatedentity’s asset base. The decision of the High Court of Australia in the “Wik” case has the potential to introduce delay in the grant of mineral andpetroleum tenements and consequently to impact generally the timing of exploration, development and production operations. An assessment ofthe impact upon the timing of particular operations may require consideration and determination of complex legal and factual issues.

Guarantees provided by Santos Ltd for borrowings in respect of controlled entities are disclosed in note 18.

Santos Ltd has provided parent company guarantees in respect of:

(a) the funding and performance obligations of a number of subsidiary companies, relating to:

• the supply, operation and maintenance of the Mutineer-Exeter floating production storage and offloading facility;

• a Patricia Baleen equipment master rental agreement;

(b) the payment of certain financial obligations of certain subsidiary companies in relation to farmout agreements and exploration concessions;and

(c) a subsidiary company’s obligations to meet distribution charges for gas retail customers.

The total expenditure commitment under these transactions and which are the subject of a parent company guarantee is $256.2 million.


126


34. Financial Instruments

Comparative information has been prepared under previous GAAP in accordance with the transition rules in AASB 1 “First-time Adoption of AustralianEquivalents to International Financial Reporting Standards”.

Exposure to foreign currency, interest rate, credit, and commodity price risks arises in the normal course of the consolidated entity’s business.Derivative financial instruments are used to hedge exposure to fluctuations in foreign exchange rates, interest rates, and commodity prices.

(a) Foreign currency riskThe consolidated entity is exposed to foreign currency risk principally through the sale of liquid petroleum products denominated inUS dollars, US dollar borrowings and US dollar expenditure. In order to hedge this foreign currency risk, the consolidated entity has from timeto time entered into forward foreign exchange, foreign currency swap and foreign currency option contracts.

US dollar denominated borrowings are either swapped into Australian dollar exposure (2005: $nil; 2004: US$321.4 million) or designated asa hedge of US dollar denominated investment in foreign operations (2005: US$782.6 million; 2004: US$313.0 million) or as a hedge of futureUS denominated sales revenues (2005: $nil; 2004: US$146.4 million). As a result, there were no net foreign currency gains or losses arisingfrom translation of US denominated dollar borrowings recognised in the income statements in 2005. Accordingly, $nil unrealised foreigncurrency gains were deferred as at 31 December 2005 (2004: gains of $37.4 million).

Recognised assets and liabilitiesChanges in the fair value of forward exchange contracts that economically hedge monetary assets and liabilities in foreign currencies and forwhich no hedge accounting is applied are recognised in the income statement. Both the changes in fair value of the forward contracts and theforeign exchange gains and losses relating to the monetary items are recognised as an expense. The fair value of forward exchange contractsused as economic hedges of monetary assets and liabilities in foreign currencies and recognised in fair value derivatives at 31 December 2005was $nil (2004: $11.2 million).

(b) Interest rate riskHedgingThe consolidated entity adopts a policy of ensuring that the majority of its exposure to changes in interest rates on borrowings is on a floatingrate basis. Interest rate swaps, denominated in Australian dollars and US dollars, have been entered into as fair value hedges of medium-termnotes and long-term notes respectively. The swaps have maturities ranging from one to 18 years, following the maturity of the related notes(see the following table) and have fixed swap rates ranging from 5.85% to 8.44%. At 31 December 2005, the consolidated entity had interestrate swaps with a notional contract amount of $654.5 million (2004: $522.8 million).

The consolidated entity classifies interest rate swaps as fair value hedges and states them at fair value. The fair value of swaps at 1 January2005 was adjusted against the opening balance of retained earnings at that date.

The net fair value of swaps at 31 December 2005 was $27.1 million, comprising assets of $27.2 million and liabilities of $0.1 million. Theseamounts were recognised as fair value derivatives.

Annual Report 2005



34. Financial Instruments (continued)

(b) Interest rate risk (continued)

Effective interest rates and repricing analysisIn respect of income-earning financial assets and interest-bearing financial liabilities, the following table indicates their effective interestrates at the balance sheet date and the periods in which they reprice.

6 months 6–12 More thanEffective Total or less months 1–2 years 2–5 years 5 years

Consolidated Note interest rate $million $million $million $million $million $million

2005Cash and cash equivalents 7 5.02% 229.2 229.2 – – – –Bank loans 18 5.02% (261.5) (261.5) – – – –Commercial paper 18 5.83% (265.5) (265.5) – – – –Medium-term notes 18 6.22%* (468.5) – – – (20.0) (448.5)Long-term notes 18 6.00%* (832.6) – – (152.1) (200.5) (480.0)Interest rate swaps** 27.1 (627.4) – 83.3 104.0 467.2

(1,571.8) (925.2) – (68.8) (116.5) (461.3)

2004Cash and cash equivalents 7 4.55% 126.1 126.1 – – – –Bank loans 18 2.70% (227.9) (227.9) – – – –Commercial paper 18 5.61% (209.0) (209.0) – – – –Medium-term notes 18 6.25%* (20.0) – – – (20.0) –Long-term notes 18 5.61%* (801.5) – (43.7) – (173.4) (584.4)Interest rate swaps** – (522.8) – – 98.3 424.5

(1,132.3) (833.6) (43.7) – (95.1) (159.9)

* After incorporating the effect of interest rate swaps.** Notional principal amounts.

(c) Commodity price risk exposureThe consolidated entity is exposed to commodity price fluctuations through the sale of petroleum products denominated in US dollars. Theconsolidated entity enters into commodity crude oil price swap and option contracts and natural gas swap and option contracts to manage itscommodity price risk.

At 31 December 2005 the consolidated entity has no open oil price swap contracts. At 31 December 2004 the consolidated entity had open oilprice swap contracts with settlement expiry dates up to nine months. If closed out at that date these contracts would have resulted in a loss of$11.2 million.

(d) Credit riskCredit risk represents the potential financial loss if counterparties fail to perform as contracted. Management has a credit policy in place andthe exposure to credit risk is monitored on an ongoing basis.

The consolidated entity controls credit risk on derivative financial instruments by setting exposure limits related to the creditworthiness ofcounterparties, all of which are selected banks or institutions with a Standard & Poor’s rating of A or better.

The maximum exposure to credit risk is represented by the carrying amount of financial assets of the consolidated entity, excluding investments,which have been recognised on the balance sheet. At the balance sheet date there were no significant concentrations of credit risk.

(e) Fair valuesThe financial assets and liabilities of the consolidated entity and the Company are recognised on the balance sheets at their fair value inaccordance with the accounting policies in note 1, except for long-term notes that do not form part of an interest rate swap, and bankborrowings, which are recognised at face value.

The carrying value of the long-term notes is US$198.5 million and their fair value is estimated at US$203.3 million based on discounting thefuture cash flows excluding the credit spread at the time of issue. The discount rate used is the interest rate swap rate for the remaining termto maturity of the note as at 31 December 2005.

The carrying value of the bank borrowings approximates fair value as it is a floating rate instrument.


128


35. Economic Dependency

There are in existence long-term contracts for the sale of gas, but otherwise the Directors believe there is no economic dependency.

36. Explanation of Transition to AIFRSs

As stated in note 1, these are the consolidated entity’s first consolidated financial statements prepared in accordance with AIFRSs.

The accounting policies in note 1 have been applied in preparing the financial statements for the year ended 31 December 2005, the comparativesinformation presented in these financial statements for the year ended 31 December 2004, and in the preparation of an opening AIFRS balancesheet at 1 January 2004 (the consolidated entity’s date of transition).

In preparing its opening AIFRS balance sheet, the consolidated entity has adjusted amounts reported previously in financial statements preparedin accordance with its old basis of accounting (previous GAAP). An explanation of how the transition from previous GAAP to AIFRSs has affectedthe consolidated entity’s financial position and financial performance is set out in the following tables and the notes that accompany the tables.

There are no material differences between the cash flow statement presented under AIFRSs and the cash flow statement presented underprevious GAAP.

Annual Report 2005



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1,68

9.6

(25.

6)1,

664.

01,

954.

87.

61,

962.

449

2.5

(289

.2)

203.

349

7.2

(317

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180.

2

Tota

l lia

bilit

ies

2,13

0.4

(32.

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097.

92,

457.

521

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478.

82,

632.

2(2

90.3

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341.

92,

677.

5(3

02.3

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375.

2

Net a

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2,00

7.4

3,49

3.4

(1,1

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82,

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0(7

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33,

405.

2(7

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3

Equi

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1,89

3.1

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893.

12,

139.

02.

72,

141.

71,

893.

1–

1,89

3.1

2,13

9.0

2.7

2,14

1.7

Rese

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(145

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(154

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(12.

2)(1

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)(1

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––

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tain

ed p

rofi

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1,20

3.6

(935

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268.

51,

366.

6(9

55.2

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1.4

871.

9(7

75.7

)96

.21,

266.

2(7

59.6

)50

6.6

Tota

l equ

ity

3,08

7.9

(1,0

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43,

493.

4(1

,135

.6)

2,35

7.8

2,76

5.0

(775

.7)

1,98

9.3

3,40

5.2

(756

.9)

2,64

8.3

Annual Report 2005



36. Explanation of Transition to AIFRSs (continued)

Reconciliation of profit for 2004Consolidated Santos Ltd

Effect of Effect ofPrevious transition Previous transition

GAAP to AIFRSs AIFRSs GAAP to AIFRSs AIFRSsNote $million $million $million $million $million $million

Product sales 1,500.9 – 1,500.9 568.8 – 568.8Cost of sales b,c,d (1,038.7) 64.5 (974.2) (414.5) 9.3 (405.2)

Gross profit 462.2 64.5 526.7 154.3 9.3 163.6Other revenue 14.3 – 14.3 270.4 – 270.4Other income b 180.0 9.0 189.0 378.1 37.9 416.0Other expenses a,b,c (85.6) (78.0) (163.6) (56.6) (11.1) (67.7)

Operating profit before net financing costs 570.9 (4.5) 566.4 746.2 36.1 782.3Interest income 3.5 – 3.5 45.1 – 45.1Finance costs d,e (33.6) (17.5) (51.1) (91.1) (6.7) (97.8)

Net financing costs (30.1) (17.5) (47.6) (46.0) (6.7) (52.7)

Profit before tax 540.8 (22.0) 518.8 700.2 29.4 729.6Income tax expense f (160.9) (3.2) (164.1) (57.1) (17.1) (74.2)

Net profit after income tax attributable tothe shareholders of Santos Ltd 379.9 (25.2) 354.7 643.1 12.3 655.4

Earnings per share (¢)Basic 58.6 (4.4) 54.2Diluted 58.5 (4.3) 54.2

Notes to the reconciliations of equity and profit

(a) Functional currencyThe functional currency adjustments reflect the adoption of the US dollar as the functional currency for the Timor Gap, Indonesian and PapuaNew Guinean operations. The asset carrying values are adjusted using the Australian dollar to United States dollar exchange rate at eachbalance date with differences due to exchange rate movements reflected in the foreign currency translation reserve.

The effect in the consolidated entity is to decrease net assets by $152.3 million at 1 January 2004 and decrease net assets by $31.8 million at31 December 2004. This resulted in a $5.7 million decrease in profit for the consolidated entity in 2004.

There is no adjustment in the Company on transition to AIFRS or during 2004.

(b) Successful effortsThe adoption of the successful efforts method of accounting for exploration and evaluation expenditure has resulted in the expensing ofunsuccessful exploration costs.

The effect in the consolidated entity is to decrease exploration and evaluation assets by $712.8 million at 1 January 2004. In 2004, theconsolidated entity expensed exploration and evaluation expenditure of $117.4 million.

The effect in the Company is to decrease exploration and evaluation assets by $257.6 million at 1 January 2004. In 2004, the Companyexpensed exploration and evaluation expenditure of $46.0 million.

(c) ImpairmentImpairment is assessed at an asset level, or where an asset does not generate separately identifiable cash flows impairment is assessed ona cash generating unit basis, being the smallest grouping of assets that generates independent cash flows. Impairment is measured usingdiscounted cash flows. Under previous GAAP, future cash flows were not discounted and assets were grouped together under a broader areaof interest concept which included all of the producing assets within a geological basin.

The effect in the consolidated entity is to decrease exploration and development by $248.8 million at 1 January 2004 and $73.2 million at31 December 2004; decrease land and buildings, plant and equipment by $102.1 million at 1 January 2004 and $14.6 million at 31 December2004. A net impairment reversal of $7.6 million is recognised in the income statement of the consolidated entity in 2004.


132


36. Explanation of Transition to AIFRSs (continued)

(c) Impairment (continued)The effect in the Company at 1 January 2004 is to decrease exploration and development by $105.6 million, decrease land and buildings, plantand equipment by $13.5 million and decrease investments in controlled entities by $449.6 million. At 31 December 2004 exploration anddevelopment increased by $28.3 million, land and buildings, plant and equipment increased by $6.1 million and investments in controlledentities decreased by $9.5 million. A net impairment reversal of oil and gas assets of $34.4 million and a net impairment loss of investment incontrolled entities of $9.5 million is recognised in the income statement of the Company in 2004.

(d) RestorationUnder AIFRS the liability for future restoration reflects the present value of the total expected restoration costs, and is capitalised as acomponent of oil and gas assets. Under previous GAAP, the cost of restoration was provided for over the life of the reserves.

The effect in the consolidated entity at 1 January 2004 is to increase exploration and development by $43.2 million, land and buildings, plantand equipment by $61.8 million, provisions by $39.6 million and retained earnings by $45.0 million.

The effect in the Company at 1 January 2004 is to increase exploration and development by $15.5 million, land and buildings, plant andequipment by $8.7 million, decrease provisions by $1.4 million and increase retained earnings by $17.9 million.

In 2004 the consolidated entity recognised $14.0 million interest expense from the unwind of the effect of discounting on the provision, andthe Company recognised $3.2 million.

(e) Employee benefitsSantos Ltd is the sponsor of a defined benefit superannuation plan. Under previous GAAP cumulative actuarial gains and losses on the definedbenefit plan were not recognised on the balance sheet. At the date of transition a liability has been recognised in the provision for employeebenefits. The liability is measured as the difference between the present value of the employees’ accrued benefits at that date and the netmarket value of the superannuation fund’s assets at that date.

The effect in the consolidated entity and the Company is to increase liabilities for employee benefits by $17.8 million at 1 January 2004 anddecrease it by $5.3 million at 31 December 2004.

In 2004 the consolidated entity and the Company recognised a net $0.5 million increase to profit resulting from a credit to defined benefitsexpense of $4.0 million, and interest expense of $3.5 million.

(f) Income taxUnder previous GAAP income tax expense was calculated by reference to the accounting profit after allowing for permanent differences. Thetax-effect of timing differences, which occur when items where included or allowed for income tax purposes in a period different to that foraccounting were recognised at current taxation rates as deferred tax assets and deferred tax liabilities, as applicable.

Under AIFRS, deferred tax is determined using the balance sheet liability method in respect of temporary differences arising from differencesbetween the carrying amount of assets and liabilities in the financial statements and their corresponding tax bases.

(g) Retained earningsThe effect of the above adjustments on retained earnings is as follows:

Consolidated Santos Ltd1 Jan 2004 31 Dec 2004 1 Jan 2004 31 Dec 2004


Functional currency a 18.3 5.7 – –Successful efforts b (542.1) (117.4) (180.3) (46.0)Impairment c (283.9) 7.6 (533.5) 24.9Restoration d 45.0 (11.9) 17.9 (3.2)Employee benefits e (12.5) 5.3 (12.4) 5.3Deferred tax f (159.9) 90.6 (67.4) 35.1

(935.1) (20.1) (775.7) 16.1

Annual Report 2005



37. Changes in Accounting Policy

In the current financial year the consolidated entity adopted AASB 132 “Financial Instruments: Disclosure and Presentation” and AASB 139“Financial Instruments: Recognition and Measurement”. This change in accounting policy has been adopted in accordance with the transition rulesin AASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards”, which does not require the restatementof comparative information for financial instruments within the scope of AASB 132 and AASB 139.

The adoption of AASB 139 has resulted in the consolidated entity recognising available-for-sale investments and all derivative financialinstruments as assets or liabilities at fair value. This change has been accounted for by adjusting the opening balance of retained earnings,hedging reserve and fair value reserve at 1 January 2005.

The effect of changes in the accounting policies for financial instruments on the balance sheet as at 1 January 2005 is shown below:

Consolidated Santos Ltd

Impact of Impact ofAIFRSs change in Restated AIFRSs change in Restated

31 December accounting 1 January 31 December accounting 1 January2004 policy 2005 2004 policy 2005

Note $million $million $million $million $million $million

Equity securities available-for-sale a 1.2 1.6 2.8 0.5 (0.2) 0.3Commodity hedges b – (11.1) (11.1) – (11.1) (11.1)Interest rate swaps c – 40.4 40.4 – – –Interest-bearing liabilities c (1,259.4) (43.8) (1,303.2) (1,686.2) – (1,686.2)Deferred tax liabilities (521.8) 3.8 (518.0) (133.3) 3.4 (129.9)Fair value reserve a – (1.1) (1.1) – 0.1 0.1Hedging reserve b – 7.8 7.8 – 7.8 7.8Retained earnings c (411.4) 2.4 (409.0) (506.6) – (506.6)

The transitional provisions will not have any effect in future reporting periods.

Notes to the reconciliation of financial instruments:(a) Under previous GAAP, the consolidated entity recorded available-for-sale equity securities at cost. In accordance with AIFRSs, they are now

recognised at fair value.

The effect in the consolidated entity is to increase “Investments in other entities at cost” and “Fair value reserve” by $1.6 million and$1.1 million respectively ($1.6 million less related deferred tax of $0.5 million) at 1 January 2005. The effect in the Company is to decrease“Investments in other entities at cost” by $0.2 million and “Fair value reserve” by $0.1 million ($0.2 million less deferred tax of $0.1 million).

(b) Under previous GAAP, the consolidated entity did not recognise derivatives at fair value on the balance sheet. In accordance with AIFRSsderivatives are now recognised at fair value.

The effect in the consolidated entity and the Company at 1 January 2005 is to recognise a liability for commodity hedges of $11.1 million anda charge to “Hedging reserve” of $7.8 million ($11.1 million less related deferred tax of $3.3 million).

(c) The net ineffectiveness of interest rate swap hedges in the consolidated entity of $2.4 million ($3.4 million less related deferred tax of$1.0 million) has been charged to retained earnings. No adjustment has arisen for the Company.


134

DIRECTORS’ DECLARATIONFOR THE YEAR ENDED 31 DECEMBER 2005

In the opinion of the Directors of Santos Ltd (“the Company”):

(a) the financial statements and notes, set out on pages 68 to 133, are in accordance with the Corporations Act 2001, including:

(i) giving a true and fair view of the financial position of the Company and consolidated entity as at 31 December 2005 and of theirperformance, as represented by the results of their operations and their cash flows, for the year ended on that date; and

(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and

(b) there are reasonable grounds to believe that the Company will be able to pay its debts as and when they become due and payable.

In making this declaration, the Directors declare that declarations which satisfy the requirements of section 295A of the Corporations Act 2001have been received from the Chief Executive Officer and Chief Financial Officer.

Dated this 23rd day of February 2006.

Signed in accordance with a resolution of the Directors:

Director Director

Annual Report 2005



LEAD AUDITOR’S INDEPENDENCE DECLARATION UNDERSECTION 307C OF THE CORPORATIONS ACT 2001

To the directors of Santos Ltd

I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 31 December 2005 there have been:

• No contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in relation to the audit; and

• No contraventions of any applicable code of professional conduct in relation to the audit.

KPMG Peter A JovicPartner

Adelaide23 February 2006



INDEPENDENT AUDIT REPORT TO MEMBERS OFSANTOS LTD

ScopeThe financial report and Directors’ responsibilityThe financial report comprises the income statements, balance sheets, statements of recognised income and expense, cash flow statements,accompanying notes 1 to 37 to the financial statements, and the Directors’ declaration for both Santos Ltd (the “Company”) and Santos Ltd and itsControlled Entities (the “Consolidated Entity”), for the year ended 31 December 2005. The Consolidated Entity comprises both the Company andthe entities it controlled during that year.

The Directors of the Company are responsible for the preparation and true and fair presentation of the financial report in accordance with theCorporations Act 2001. This includes responsibility for the maintenance of adequate accounting records and internal controls that are designed toprevent and detect fraud and error, and for the accounting policies and accounting estimates inherent in the financial report. The Directors arealso responsible for preparing the relevant reconciling information regarding the adjustments required under the Australian Accounting StandardAASB 1 “First-time Adoption of Australian Equivalents to International Financial Reporting Standards”.

Audit approachWe conducted an independent audit in order to express an opinion to the members of the Company. Our audit was conducted in accordancewith Australian Auditing Standards in order to provide reasonable assurance as to whether the financial report is free of material misstatement.The nature of an audit is influenced by factors such as the use of professional judgement, selective testing, the inherent limitations of internalcontrol, and the availability of persuasive rather than conclusive evidence. Therefore, an audit cannot guarantee that all material misstatementshave been detected.

We performed procedures to assess whether in all material respects the financial report presents fairly, in accordance with the Corporations Act2001, Australian Accounting Standards and other mandatory financial reporting requirements in Australia, a view which is consistent with ourunderstanding of the Company’s and the Consolidated Entity’s financial position, and of their performance as represented by the results of theiroperations and cash flows.

We formed our audit opinion on the basis of these procedures, which included:

• examining, on a test basis, information to provide evidence supporting the amounts and disclosures in the financial report, and

• assessing the appropriateness of the accounting policies and disclosures used and the reasonableness of significant accounting estimatesmade by the Directors.

While we considered the effectiveness of management’s internal controls over financial reporting when determining the nature and extent of ourprocedures, our audit was not designed to provide assurance on internal controls.

Audit opinionIn our opinion, the financial report of Santos Ltd is in accordance with:

(a) the Corporations Act 2001, including:

(i) giving a true and fair view of the Company’s and Consolidated Entity’s financial position as at 31 December 2005 and of their performancefor the financial year ended on that date; and

(ii) complying with Australian Accounting Standards and the Corporations Regulations 2001; and

(b) other mandatory financial reporting requirements in Australia.

KPMG Peter A JovicPartner

Adelaide23 February 2006



STOCK EXCHANGE AND SHAREHOLDER INFORMATION

Listed on Australian Stock Exchange at 28 February 2006 were 594,137,602 fully paid ordinary shares and 6,000,000 redeemable convertiblepreference shares. Unlisted were 46,500 partly paid Plan 0 shares, 41,500 partly paid Plan 2 shares, 49,800 fully paid ordinary shares issuedpursuant to the Santos Employee Share Purchase Plan (‘SESPP’) for General Employee Participation and 114,369 fully paid ordinary shares issuedpursuant to SESPP for Senior Executive Long Term Incentive. There were: 79,237 holders of all classes of issued ordinary shares (including 6holders of Plan 0 shares; 5 holders of Plan 2 shares; and 84 holders of SESPP shares) compared with 79,423 a year earlier; 15,609 holders ofredeemable convertible preference shares; and 34 holders of the 2,318,328 options granted pursuant to the Santos Executive Share Option Planand 36 holders of 770,200 Share Acquisition Rights.

The listed issued ordinary shares plus the ordinary shares issued pursuant to SESPP represent all of the voting power in Santos. The holdings ofthe 20 largest holders of ordinary shares represent 55.73% of the total voting power in Santos (last year 52.65%) and the holdings of the 20largest holders of redeemable convertible preference shares represent 37.85% of the issued redeemable convertible preference shares.

The 20 largest shareholders of fully paid ordinary shares in Santos as shown in the Company’s Register of Members at 28 February 2006 were:

Name Number of fully paid ordinary shares %

Westpac Custodian Nominees Limited 87,998,001 14.81National Nominees Limited 67,728,794 11.40J P Morgan Nominees Australia Limited 61,800,933 10.40ANZ Nominees Limited (Cash Income A/c) 40,464,542 6.81Citicorp Nominees Pty Limited 18,214,901 3.07ANZ Nominees Limited (Income Reinvest Plan A/c) 15,389,372 2.59Cogent Nominees Pty Limited 6,265,865 1.05RBC Dexia Investor Services Australia Nominees Pty Limited 5,862,633 0.99AMP Life Limited 3,839,880 0.65Queensland Investment Corporation 3,414,779 0.57Australian Foundation Investment Company Limited 3,189,289 0.54Mr John Charles Ellice-Flint 3,000,000 0.50Victorian Workcover Authority 2,837,623 0.48UBS Nominees Pty Ltd (Prime Broking A/c) 2,821,350 0.47Argo Investments Limited 1,536,230 0.26HSBC Custody Nominees (Australia) Limited 1,518,435 0.26Merrill Lynch (Australia) Nominees Pty Ltd 1,436,720 0.24Transport Accident Commission 1,415,779 0.24Neweconomy Com Au Nominees Pty Limited (Scrip Lending Coll Mgt A/c) 1,200,000 0.20Citicorp Nominees Pty Limited (CFSIL Cwlth Aust Shs 1 A/c) 1,180,000 0.20

Total 331,115,126 55.73

Analysis of Shares - range of shares held

Fully paid % of % of Redeemable % of % ofordinary holders shares convertible holders shares

shares held preference held(Holders) shares

(Holders)

1-1,000 27,406 34.59 2.61 15,237 97.62 44.601,001-5,000 41,261 52.07 16.47 316 2.03 11.485,001-10,000 7,037 8.88 8.44 24 0.15 2.8810,001-100,000 3,413 4.31 11.68 27 0.17 13.34100,001 and over 120 0.15 60.80 5 0.03 27.70

Total 79,237 100.00 100.00 15,609 100.00 100.00

Less than a marketable parcel of $500 1,171 2



The 20 largest shareholders of redeemable convertible preference shares in Santos as shown in the Company’s Register of Members at 28 February2006 were:

Name Number of redeemable convertible preference shares %

J P Morgan Nominees Australia Limited 1,052,985 17.55Westpac Custodian Nominees Limited 200,598 3.34Australian Foundation Investment Company Limited 175,000 2.92ANZ Nominees Limited (Cash Income A/c) 120,858 2.01RBC Dexia Investor Services Australia Nominees Pty Limited (JBENIP A/c) 112,492 1.87Cogent Nominees Pty Limited (SMP Accounts) 84,789 1.41Hastings Funds Management Limited (Hastings Yield Fund A/c) 70,000 1.17UBS Wealth Management Australia Nominees Pty Ltd 60,210 1.00Citicorp Nominees Pty Limited (CFSIL Cwlth Spec 5 A/c) 56,848 0.95Pan Australian Nominees Pty Limited 55,947 0.93Cambooya Pty Limited 41,000 0.68Questor Financial Services Limited (TPS RF A/c) 40,060 0.67RBC Dexia Investor Services Australia Nominees Pty Limited (MLCI A/c) 39,699 0.66AMP Life Limited 28,005 0.47Cogent Nominees Pty Limited 25,344 0.42Brencorp No 11 Pty Limited 24,600 0.41Australian Executor Trustees Limited 23,552 0.39Goldman Sachs JBWere Capital Markets Limited (Hybrid Portfolio A/c) 20,141 0.34Argo Investments Limited 20,000 0.33Hastings Fund Management Limited (Hit A/c) 20,000 0.33

Total 2,272,128 37.85

Substantial Shareholders, as at 28 February 2006, as disclosed by notices received by the Company:

Name No. of voting shares held

Barclays Global Investors Australia Limited 35,665,305Wellington Management Company, LLP 42,458,713

For Directors’ Shareholdings see Directors’ Statutory Report as set out on page 63 of this Annual Report.

Voting Rights

Every member present in person or by an attorney, a proxy or a representative shall on a show of hands, have one vote and upon a poll, one vote for every fully paid ordinary share held. Pursuant to the Rules of the Santos Executive Share Plan, Plan 2 and Plan 0 shares do not carry any voting rights except on a proposal to vary the rights attached to Plan shares.

Holders of redeemable convertible preference shares (“Preference Shares”) do not have voting rights at any general meeting of the Companyexcept in the following circumstances:

(a) on a proposal:

(1) to reduce the share capital of the Company;

(2) that affects rights attached to the Preference Shares;

(3) to wind up the Company; or

(4) for the disposal of the whole of the property, business and undertaking of the Company;

(b) on a resolution to approve the terms of a buy-back agreement;

(c) during a period in which a dividend or part of a dividend on the Preference Shares is in arrears; or

(d) during the winding up of the Company.



INFORMATION FOR SHAREHOLDERS

NOTICE OF MEETINGThe Annual General Meeting of Santos Ltd will be held in the FestivalTheatre at Adelaide Festival Centre, King William Road, Adelaide, SouthAustralia on Thursday 4 May 2006 at 10.00 am.

FINAL DIVIDENDThe 2005 final ordinary dividend will be paid on 31 March 2006 toshareholders registered in the books of the Company at the close ofbusiness on 6 March 2006 in respect of fully paid shares held at recorddate.

STOCK EXCHANGE LISTINGSantos Ltd. Incorporated in Adelaide, South Australia, on 18 March1954. Quoted on the official list of the Australian Stock Exchange Ltd(ordinary shares code STO; FUELS code STOPB).

AMERICAN DEPOSITORY RECEIPTSSantos American Depository Receipts are issued by Citibank, N.A. andare listed on NASDAQ (code STOSY).

DIRECTORSS Gerlach (Chairman), J C Ellice-Flint (Managing Director), P C Barnett(retired 28 February 2006), K A Dean, R M Harding, G W McGregor(retired 30 September 2005), M A O’Leary, C J Recny, J Sloan.

SECRETARYW J Glanville

CHANGE OF SHAREHOLDER DETAILSIssuer Sponsored Shareholders wishing to update their details mustnotify the Share Registrar in writing. The relevant shareholder formscan be obtained from the Share Registrar or via the Investor Centre onthe Santos website, www.santos.com.

Forms are available to advise the Company of changes relating tochange of address, direct crediting of dividends, Tax File Number andAustralian Business Number, Annual Report and Sustainability Reviewmailing preferences and Dividend Reinvestment Plan participation.

INVESTOR INFORMATION AND SERVICESSantos website

A wide range of information for investors is available from Santos’website, www.santos.com, including Annual Reports, Full Year andInterim Reports and Presentations, Press Releases, Quarterly ActivitiesReports and Current Well Information.

Comprehensive archives of these materials dating back to 1997 areavailable on the Santos website.

Other investor information available on the Santos website includes:

• open briefings with Corporate File – an ASX-endorsed online briefing service

• live and archived webcasts of investor briefings

• an email alert facility where shareholders and other interested parties can register to be notified, free of charge, of Santos’ Press Releases via email.

The Santos website provides shareholder forms to help shareholdersmanage their holdings, as well as a full history of Santos’ dividendpayments and equity issues. Shareholders can also check their holdingsand payment history in the secure View Shareholding section.

Santos’ website also provides an online Conversion Calculator, whichinstantly computes equivalent values of the most common units ofmeasurement in the oil and gas industry.

Publications

The Annual Report, First-Half Report and the Sustainability Review arethe major sources of printed information about Santos. Printed copiesare available from the Share Registrar or Investor Relations.

SHAREHOLDER ENQUIRIESEnquiries about shareholdings should be directed to:

Share Registrar, Santos Ltd, GPO Box 2455,Adelaide, South Australia 5001. Telephone: 08 8218 5111.Email: [email protected]

Investor information, other than that relating to a shareholding, can be obtained from:

Investor Relations, Santos Ltd, GPO Box 2455,Adelaide, South Australia 5001. Telephone: 08 8218 5111.Email: [email protected]

Electronic enquiries can also be submitted through the Contact Ussection of the Santos website, www.santos.com.

SHAREHOLDERS’ CALENDAR2005 full year results announcement 23 February 2006

Ex-dividend date for 2005 full year dividend 28 February 2006

Record date for 2005 full year dividend 6 March 2006

Payment date for 2005 full year dividend 31 March 2006

Annual General Meeting 4 May 2006

Half year end 30 June 2006

2006 interim results announcement 24 August 2006

Full year end 31 December 2006

QUARTERLY REPORTING CALENDAR2006 First Quarter Activities Report 27 April 2006

2006 Second Quarter Activities Report 27 July 2006

2006 Third Quarter Activities Report 24 October 2006

2006 Fourth Quarter Activities Report 24 January 2007



AIFRSAustralian equivalents to International FinancialReporting Standards.

barrel/bblThe standard unit of measurement for allproduction and sales. One barrel = 159 litres or 35 imperial gallons.

bcfBillion cubic feet, a billion defined as 109, on average 1 bcf of sales gas = 1.055 PJ.

boeBarrels of oil equivalent. The factor used by Santos to convert volumes of differenthydrocarbon production to barrels of oilequivalent.

bopdBarrels of oil per day.

contingent resourcesThose quantities of hydrocarbons which areestimated, on a given date, to be potentiallyrecoverable from known accumulations, butwhich are not currently considered to becommercially recoverable. Contingent resourcesmay be of a significant size, but still haveconstraints to development. These constraints,preventing the booking of reserves, may relateto lack of gas marketing arrangements or totechnical, environmental or political barriers.

the Company or SantosSantos Ltd and its subsidiaries.

DD&ADepreciation, depletion and amortisation ofbuilding, plant and equipment, exploration and development expenditure.

delineation wellComprises two categories: near-field exploration wells and appraisal wells. Near-fieldexploration wells are wells located near existingfields/discoveries and have a higher expectationof success than wildcat exploration wells. Thesewells test independent structures or traps andhave a higher risk of failure than appraisal ordevelopment wells. An appraisal well is a welldrilled for the purpose of identifying extensionsto known fields or discoveries.

development wellWells designed to produce hydrocarbons from a gas or oil field within a proven productivereservoir defined by exploration or appraisaldrilling.

EBITEarnings before interest and tax.

EBITDAEarnings before interest and tax, depreciation,depletion and amortisation of building, plantand equipment, exploration and developmentexpenditure and amortisation of goodwill.

EBITDAXEarnings before interest, tax, depreciation,exploration and impairment.

finding cost per barrel of oil equivalentExploration and delineation expenditure perannum divided by reserve additions net ofacquisitions and divestments.

hydrocarbonsSolid, liquid or gas compounds of the elementshydrogen and carbon.

IFRSInternational Financial Reporting Standards.

LNGLiquefied natural gas.

LPGLiquefied petroleum gas, the name given topropane and butane in their liquid state.

mbblsThousand barrels.

mean resource potentialThe average of the range of recoverable resources.

mmbblsMillion barrels.

mmboeMillion barrels of oil equivalent.

mmscf/dMillion standard cubic feet per day.

petroleum liquidsCrude oil, condensate, or its derivative naphtha, and the liquefied petroleum gasespropane and butane.

PJPetajoules are the metric measurement unit forenergy. A petajoule is equal to 1 joule x 1015.The equivalent imperial measure to joules isBritish Thermal Units (BTU). One kilojoule =0.9478 BTU.

Proven reserves (1P)Proven reserves (1P) are those reserves that, to a high degree of certainty (90% confidence),are recoverable. There is relatively little riskassociated with these reserves. Provendeveloped reserves are reserves that can berecovered from existing wells with existinginfrastructure and operating methods. Provenundeveloped reserves require development.

Proven plus Probable reserves (2P)Proven plus Probable reserves (2P) are thosereserves that analysis of geological andengineering data suggests are more likely thannot to be recoverable. There is at least a 50%probability that reserves recovered will exceedProven plus Probable reserves.

Proven, Probable plus Possible reserves (3P) Proven, Probable plus Possible reserves (3P) arethose reserves that, to a low degree of certainty(10% confidence), are recoverable. There isrelatively high risk associated with thesereserves.

PSCProduction sharing contract.

reserve replacement cost per barrel of oil equivalentExploration, delineation and developmentexpenditure per annum divided by reserveadditions net of acquisitions and divestments.Development includes all development and fixedasset expenditure net of stay-in-business andcorporate capital expenditure.

reserve replacement ratioReserves added during the reporting perioddivided by the production over the same period,reported as a percentage.

resource potentialResource potential refers to those quantities of petroleum yet to be discovered. It may refer to single opportunities or a group of opportunities.

ROAEReturn on average equity.

ROACEReturn on average capital employed.

seismicData used to gain an understanding of rockformations beneath the earth’s surface usingreflected sound waves.

tcfTrillion cubic feet.

TJTerajoules are the metric measurement unit forenergy. A terajoule is equal to 1 joule x 1012.

total recordable case frequency rate (TRCFR)A statistical measure of safety performance.Total recordable case frequency rate is calculatedas the total number of recordable cases (medicaltreatment injuries and lost time injuries) permillion hours worked. A lost time injury is awork-related injury or illness that results, orwould result, in a permanent disability or timelost of one complete shift or day or more anytime after the injury or illness. A medicaltreatment injury is a work-related injury orillness, other than a lost time injury, where the injury is serious enough to require morethan minor first aid treatment. Santos classifiesinjuries that result in modified duties as medicaltreatment injuries.

wildcat explorationExploration wells testing new play concepts orstructures distanced from current fields.

GLOSSARY

Conversioncrude oil 1 barrel = 1 boe

sales gas 1 petajoule = 171.937 boe x 103

condensate/naphtha 1 barrel = 0.935 boe

LPG 1 tonne = 8.458 boe

For a comprehensive online conversioncalculator tool, visit the Santos website,www.santos.com.


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